Russell W. Hall, CFP®

Once again, a slew of California propositions have been voted into law. One in particular, Proposition 19, may affect you or your loved ones if you own or will inherit property located in California. There is a limited window before February 15, 2021 to take action, so read on to find out if you’re affected and what you might do.

The Good

Proposition 19 – officially “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act” – will be beneficial for several groups. Under past laws (Proposition 13 and later clarifying propositions), homeowners over 55 and the severely disabled could transfer their property tax basis one time to a new home, as long as the replacement residence was valued less than their original home.

Prop 19 will now allow seniors, disabled, and those affected by wildfire and other natural disasters to transfer their property tax basis to a home of any value, even if it is more expensive than their current residence. There will be a basis adjustment calculated if trading up to a more expensive property, but that is still an improvement over current law. In addition, the property tax transfer may now be done up to three times.

The Bad

Under previous law, parents could gift or leave their principal residence to their children with the low property tax basis intact. That is still mostly true IF a child lives in the home and uses it as their primary residence (although there is now a complicated calculation involved). However, if the child or children wish to rent out the property instead – a common occurrence previously – they would now lose the exemption and the home will be reassessed, with higher taxes as a result.

For property other than primary residence (including residential, commercial or industrial), the $1 million existing tax base exemption will not continue under Prop 19. Those gifted or inherited properties will be reassessed as well, with the new owners paying more property taxes.

The In Between

As noted, these rules won’t affect transfers occurring before February 15, 2021. If you are a parent looking to pass property to your heirs, there might be an opportunity to act now.

That said, you should consider the downside of completing a gift – you pass along any unrealized gain in the property as well. Compare that to receiving an inheritance, where the cost basis is usually reset at death so that any taxable gain is effectively removed. You will also use up some of your lifetime gift exemption, although since that limit is currently over $11 million that is not as big of an issue for most people.

If you think you might be affected by Prop 19, we’re happy to help you think through the pros and cons.  Please contact us or schedule a 15-minute discovery call with a fee-only financial advisor.