Prop 19 is an amendment to the California State Constitution that changed how California property tax laws work for inheriting property. If you haven’t looked at your estate planning in the last few years, you may be missing a key estate tax benefit that may cause you to have to pay high estate taxes and possibly be forced to sell.
What is Prop 19?
Proposition 19 is a change to how real estate property is taxed in California. It was passed by voters on November 3, 2020 and was enacted on September 30, 2021. That is why it is so important that you talk to a tax professional now who can advise you on the intricacies of the law for your California estate planning.
Prop 19 changed California property tax law supposedly to make it easier for seniors over 55 and disadvantaged families to transfer real estate to their children. It allows you to transfer it at the assessed value based on when they acquired the property—instead of reassessing it at a higher value with a higher property tax rate upon your death.
Who qualifies for Prop 19 benefits?
To qualify for the Prop 19 property tax benefits, you must be over 55 years old age, disabled, or be a victim of a natural disaster. Parents or grandparents can pass along their primary residence and its property tax basis to their children or grandchildren. Yet, beware that there are restrictions under Prop 19.
What are Prop 19 frequently asked questions?
It sounds simple, but a quick read of the government’s Prop 19 overview quickly shows how complicated it actually is.
You will want to speak to a tax specialist who can address the key Prop 19 questions:
- Is transferring property still advantageous?
- Should you transfer your home to your children to preserve the lower property tax assessed value?
- What if my heir maintains their current principal residence—will they keep my low tax basis on property I transfer to them?
- Can I still live in my home after I transfer it to my children or grandchildren?
Pros of Prop 19: How you might benefit
- By gifting your children with property, the value of the asset will not appreciate in the estate and your children’s estate tax may be reduced.
- Your child or grandchild benefits from grandfathered lower California property tax if they live in the home as their own principal residence within one year of the transfer.
- Up to $1 million of assessed value is included in Prop 19. The $1 million property value threshold is indexed for inflation. For Proposition 19 intergenerational transfers occurring on February 16, 2023, through February 15, 2025, the exclusion is equal to $1,022,600.
- You can make as many qualified transfers of different properties as you wish. In other words, you can live in one residence and transfer it to one child. Then you can move into another home, live there for a number of years, then transfer it to another child.
Cons of Prop 19: CA property tax complications
- If your child or grandchild must live in the home. If it is used as a second home or vacation property, the home no longer qualifies for the tax benefits.
- If you have multiple children, there may be disagreement about the property, creating conflict in your life. One may want to live there. Another may want to sell it. Still another might want to rent it.
- After you transfer the property, it is no longer yours and you no longer have control of it. Your child could sell it without your consent.
- Your property may be at risk in the case of a child’s future divorce.
- If you change your mind and want your property back, you may put a financial burden on your child or grandchild in a complex and expensive transaction that incurs additional taxes.
Bernstein Financial Services Inc. has guided business owners through the complexities of the tax code and improved their profit margins since 1989. The information provided in this blog post is for general informational purposes only and is not intended as legal advice. Every business and financial situation is unique, and the strategies discussed may not be applicable to your specific circumstances.
For personalized guidance, please schedule a consultation appointment with a Principal at Bernstein Financial Services to help you determine your optimal planning strategies. with a Principal at Bernstein Financial Services to help you determine your optimal planning strategies.