Whether you voted for it or against it, Proposition 19 is likely to impact you or a family member at some point in your life. This controversial proposition, passed in November 2020 by a majority vote of 51.1%, amended the California Constitution and introduced two major changes to property tax law that both expanded and restricted benefits available to taxpayers. The first change restricted benefits associated with property transfers between parents and their children and the second expanded options for individuals who are (1) age fifty-five (55) or older, (2) severely or permanently disabled, or (3) victims of a wildfire or government declared natural disaster. This article is intended to provide a brief background of the unique rules governing real property taxes in California followed by a comparison of the laws, pre and post amendment, highlighting the most notable changes impacting real property owners throughout the state.
Proposition 13
California property taxes are governed by Proposition 13 (“Prop 13”), which was enacted by the voters in 1978. Under Prop 13, property owners retain a base year value on their property that can only be increased each year by the lesser of the Consumer Price Index or 2%, unless there is a reassessable event, i.e. change in ownership or new construction. California law provides for a number of exclusions to reassessable events, itemized in Section 2, Article XIII A of the California Constitution which have benefited taxpayers for decades. With the passing of Proposition 19, two of these exclusions have been modified in several significant ways.1
Parent to Child Property Transfers
Before Proposition 19
Proposition 58, passed in 1986 and codified by Revenue and Taxation Code § 63.1, controlled local reassessment of real property transfers between parents and their children. Rev. and Tax. Code § 63.1 allowed a parent to transfer their principal residence2, unlimited in value, to their children without reassessment. This coveted exclusion also allowed a parent to transfer $1,000,000 worth of non-principal residence real estate to their children without tax consequences. The $1,000,000 addition to the exclusion is enhanced by the fact that it was calculated on the property’s adjusted base year value, determined immediately prior to the transfer, and not the property’s fair market value. This often allowed families to qualify multiple properties with little to no property tax consequences.
New Rule under Proposition 19
The new rules governing parent to child3 transfers are implemented by Rev. and Tax. Code § 63.2. For transfers on or after February 15, 2021, the parent to child exclusion is now limited to transfers of principal residences4 only if the child also uses the property as his/her own principal residence following the transfer.5 More specifically, the child must now apply for a homeowners’ exemption, or disabled veterans’ exemption, within one year of the property transfer to qualify for this exclusion.6
While the value of a principal residence used to be unlimited, Proposition 19 now limits the benefit to a value of the principal property’s base year value, plus one (1) million dollars as adjusted annually by the State Board of Equalization.7 Put another way, a full exclusion will only apply if the fair market value of the property, assessed at the time of the transfer, is less than the pre-transfer adjusted base year value, plus one (1) million dollars.8 If the fair market value of the property is in excess of the adjusted base year value, plus one (1) million dollars, the property is reassessed by adding the excess value to the pre-transfer adjusted base year value.
For example, if mom owned a property with a current fair market value of $1.2 million that had a $350,000 trended base year value for property tax purposes, she could transfer the property to her child without reassessment because the fair market value is less than the exclusion value ($1,350,000). If, however, under the same facts the current fair market value of the property was $2 million, the property would undergo a partial reassessment upon transfer because the fair market value is greater than the exclusion value. The reassessed value for property tax purposes would be $350,000 plus $650,000 (which is the difference between the FMV and the exclusion value), or $1,000,000.
In addition to employing a value cap on principal residence transfers, Proposition 19 completely eliminated the $1,000,000 non-principal residence exclusion. Therefore, only principal residences (used as such both before and after the transfer) qualify for the exclusion under the new rule. These modifications nearly eliminated the benefits of this exclusion realized by residential homeowners, except under very narrow circumstances.
Base Year Value Transfers – Over 55, Severely Disabled, or Victim of Natural Disaster
Before the Change
For base year value transfers – that is, when an individual takes the adjusted base year value for their principal residence and transfers it to a replacement home – the old law was more restrictive. For example, pre-Prop 19, the adjusted base year value for an individual over 55 could only be transferred once, unless the individual later qualifies as severely or permanently disabled.9 Moreover, the adjusted base year value could only be transferred to a replacement home within the same county, unless another county similarly provides for an intercounty ordinance (there were only 10 in the state).10 Lastly, the ability to transfer was limited to a replacement home of equal or lesser value, which is assessed on a sliding scale depending on how soon after the original sale a replacement home was purchased.11
Expanded Rule under Proposition 19
Base year transfers for qualifying individuals are now geographically unlimited. A transfer can be made to any county within the state of California.12 Furthermore, it is no longer an all or nothing rule with respect to the value. If a replacement home value exceeds that of the original home, the base year value may still be transferred but will be adjusted by the difference in fair market value between the two. Moreover, qualified individuals are able to take advantage of the tax benefit three times, even if the single use benefit was previously used under the old law.13
The relevant date to be aware of here is April 1, 2021. So long as either the sale of the original home, or the purchase or new construction of the replacement home, takes place on or after April 1, 2021, the advantages of Prop 19 will govern the transfer.14
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Gregory R. Broege Partner Ajalat, Polley, Ayoob, Matarese & Broege |
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Michael P. Kelly Associate Ajalat, Polley, Ayoob, Matarese & Broege |
1 The 2020 Constitutional Amendment is expressed in Section 2.1, Article XIII A of the California Constitution.
2 See definition in Rev. and Tax. Code § 63.1(b)(1).
3 The “parent to child” transfer exclusion similarly applies to real property transfers from child to parent, but for exemplary purposes, the exclusion will be referred to herein as “parent to child”.
4 See definition in Rev. and Tax. Code § 63.2(e)(5) which remains largely unchanged.
5 Rev. and Tax. Code § 63.2(a)(1)(A).
6 Rev. and Tax. Code § 63.2(a)(1)(B).
7 Rev. and Tax. Code § 63.2(d); See also California Constitution, Article XIIIA, Section 2.1(c)(4) – Beginning on February 16, 2023 and every February 16 thereafter, the State Board of Equalization will begin adjusting the $1,000,000 for inflation to reflect the percentage change in the House Price Index for California for the prior calendar year
8 Rev. and Tax. Code § 63.2(d)(2)(A).
9 Rev. and Tax. Code § 69.5(b)(7).
10 Rev. and Tax. Code § 69.5(a)(1)&(2).
11 To qualify, a replacement property must be purchased or newly constructed within two years (before or after) of the sale of the original home. The replacement home value is increased by % increments if purchased or newly constructed after the original sale to account for inflation.
12 It should be noted, however, that while a qualified base year value will remain the same, the actual amount of property taxes may change. A property's property tax is dependent upon the tax rate area where the property is located.
13 LTA No. 2021/019, Question No. 15.
14 If the replacement home is purchased and, in part, newly constructed, the relevant date is the latter of the purchase date or the completion of construction.
Gregory R. Broege, Michael P. Kelly or Ajalat, Polley, Ayoob, Matarese & Broege are not affiliated with First American Trust, FSB or its affiliates. The information presented here is offered for general educational purposes only. It is not intended to constitute legal advice, and it does not indicate or establish any attorney-client relationship. Always consult a licensed attorney before making any decision concerning your property tax plan (or any other legal matter).
