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Understanding California’s Proposition 19: What Homeowners Need to Know 4 Years Later.

Posted by James Burns | Oct 11, 2024 | 0 Comments

If you own property in California, you've probably heard about Proposition 19. But, like many, you may still be confused about how it works, especially regarding taxes and inheritance. Don't worry, you're not alone! Let's break it down in simple, easy-to-understand terms so you can feel more confident about how this law affects you and your family.

What Is Proposition 19?

Proposition 19, which passed in November 2020, is a law that primarily deals with property taxes and transferring tax benefits under certain conditions. It changes two important things for homeowners:

  1. How you can transfer your property tax base if you're moving homes, especially if you're over 55, severely disabled, or a victim of a natural disaster.

 

  1. How inherited properties are taxed, which can significantly increase property taxes for heirs unless the home becomes their primary residence.

Let's take a closer look at these two major aspects.

Transferring Your Tax Base

In California, Proposition 13 (passed in 1978) froze property tax assessments at the time of purchase, meaning your property taxes only increase by a small percentage each year, even if your home's value skyrockets. If you've owned your home for decades, you're likely paying much lower taxes compared to someone who just bought a similar home next door.

Proposition 19 allows eligible homeowners—those over 55, people with severe disabilities, or those who've lost their homes in a natural disaster—to transfer this low tax base to a new home. This means you won't have to pay much higher property taxes just because you're moving to a more expensive or newer home. You can use this benefit up to three times in your lifetime, giving you more flexibility to downsize or relocate without facing a huge tax hike.

Example: Imagine you're 60 years old and bought your home 30 years ago for $200,000. Your property taxes are still based on that purchase price, even though your home is now worth $1 million. Under Proposition 19, if you sell your home and buy a new one for $900,000, you can transfer your old property tax base to the new home. Essentially, you'll still pay property taxes as if your new home is only worth $200,000, saving you thousands in taxes each year.

Inheritance and Property Taxes: The Big Change

The second part of Proposition 19—perhaps the more controversial one—deals with what happens when you inherit property. Under the previous law, children (and sometimes grandchildren) could inherit their parents' or grandparents' property and keep the low property tax base, even if the property was used as a rental or second home. This meant that heirs could enjoy paying very low property taxes on homes they didn't even live in, while renting them out for high market rates.

Proposition 19 changes this. Now, for your heirs to keep your lower property tax base, the inherited home must become their primary residence. And even then, the tax benefits only apply if the difference between the home's market value and the original taxable value isn't too large (the law sets this threshold at $1 million).

If your children or grandchildren don't move into the home, the property will be reassessed at its current market value, potentially leading to a huge tax increase.

Example: Let's say your family home was purchased for $100,000 decades ago, and your property taxes are still based on that amount. The home is now worth $2 million. If your children inherit the home and plan to live in it, they can keep the lower tax base for the first $1 million of that increased value. So, they'd pay taxes as if the home was worth $1.1 million (the $100,000 plus $1 million). If they choose not to live there, however, the property will be reassessed at its full $2 million market value, meaning their annual property taxes could increase dramatically.

Can You Avoid Proposition 19?

The short answer is: not really.

For many families, Proposition 19 brings some harsh realities when it comes to estate planning. If your children don't plan to move into the family home, there's no way to avoid the reassessment to market value under the new law. Even traditional estate planning tools like trusts don't exempt you from Proposition 19. This has been frustrating for some, especially families who hoped to keep multi-generational properties or rental income homes with low property taxes.

That said, there are a few strategies people might consider, though none are foolproof. One option is gifting the property to your children before the law took effect (this isn't an option anymore for most people), though that comes with its own tax complications, like capital gains tax. Another strategy is to carefully weigh whether it makes sense for your heirs to keep the property at all. For many, it may be more beneficial to sell the home, take the proceeds, and invest elsewhere, especially if the new tax burden outweighs the sentimental or financial value of keeping the home.

Final Thoughts

Proposition 19 has certainly changed the landscape for California homeowners. While it offers some great benefits for those over 55 looking to downsize or relocate, it also places new limits on how property can be passed down through generations without facing steep tax hikes.

If you're planning your estate or thinking about buying or selling property, it's crucial to consider how Proposition 19 affects you and your family. In some cases, working with a tax advisor or estate planner may be necessary to make the most informed decisions. Though avoiding the reassessment for inherited properties is unlikely, understanding the law will help you navigate the changes more confidently and make smarter choices for your financial future.

Need Help Navigating Proposition 19?

The Law Office of James Burns is here to help you understand Proposition 19 and how it impacts your estate planning. Whether you're looking to protect your family's assets or need guidance on property tax transfers, we're just a phone call away. Contact us at (555) 123-4567 or visit us online at www.jamesburnslaw.com to schedule a consultation and get personalized advice for your situation.

About the Author

James Burns

James Burns, Esq. is a seasoned attorney specializing in estate planning, asset protection, and tax law. Known for his expertise in Private Placement Life Insurance (PPLI), James helps high-net-worth individuals protect their wealth and achieve tax efficiency, including pre-immigration planning. With over 20 years of legal experience, he offers tailored solutions for estate planning and corporate transactions. James is also a published author and sought-after speaker, recognized for his deep knowledge and strategic approach to wealth preservation.

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