On November 3, 2020, California voters approved Proposition 19. This new law took effect on April 1, 2021 and replaced tax incentives put in place by voters decades ago. In this article, we’ll discuss the pros and cons of Prop 19 and how the changes may impact your plans to transfer property.
What is Prop 19?
Prop 19 is legislation that impacts California homeowners who are over 55 years old, who have severe disabilities, or who lost a home in a natural disaster.
For these people selling their home,
- you may transfer your property tax basis to a new property up to three times anywhere in California, subject to certain restrictions
- you may transfer your property tax basis to a new property of any value, with limits
- you may transfer your principal residence property tax basis to your child, with limits
- you may not transfer your property tax basis to non-residential properties
“Property Tax basis” is the amount your home is valued at for property tax assessment. Generally this will be the amount on your annual property tax statement.
The Revisions to Proposition 13
In 1978, California voters adopted Prop 13, a law that placed restrictions on property taxes and allowed seniors to transfer their property tax basis to a new home so long as the new home was equal or lesser value (than the new home) within specific geographical limits (ie Los Angeles County to a neighboring county like Ventura County. The inheritors of the residence paid the “grandfathered” tax rates. As a result, California seniors became disincentivized to move.
Though Prop 19 made transferring tax basis easier for seniors and disadvantaged families, it’s unclear if transferring property is still advantageous.
Should parents i.e., gift their home to their children to preserve the lower property tax basis?
This subject is complex and can affect income tax, estate tax, property tax, and legal estate issues, such as inheritance. Below is a list of potential positives and negatives of Prop 19 which is meant to help you understand the many factors when deciding to gift property.
Negatives of Prop 19
If you transfer your principal residence property tax basis to your child,
- your child is required to live in the home they inherit to enjoy the “grandfathered” tax benefits. If it’s a second home or rental property, the standard market tax rate would apply
- you no longer have control of the property. Your assets may be at risk in the case of a child’s future divorce. Or, you may need your funds back and must ask your child for the funds.
- if you have multiple children, there may be disagreement about the property’s operation. Your children could sell the property without your consent.
- this will likely not allow for a step up in cost basis if inherited. So, gifting could create a larger capital gain upon sale of the asset, whereas inherited with a set up in cost basis would eliminate part or all of the gain.
You may need to file Form 709 to report gifts in excess of the $15,000 annual exclusion, although no tax will be due unless over the estate exclusion amount.
Positives of Prop 19
- By gifting your children with the property, the asset will not appreciate in the estate and your children’s estate tax may be reduced.
We strongly recommend that you consult with your tax professional or estate planning attorney, as the nuances of implementing a plan that will work for you are both legal in nature with tax consequences that may or may not be beneficial to your specific scenario.
