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The Impact of Prop 19 on Prop 13's Property Tax Protections

The Impact of Prop 19 on Prop 13's Property Tax Protections

What Is Prop 13?

Proposition 13, passed by California voters in 1978, was a landmark measure that fundamentally transformed property taxation in the state. It capped the annual real estate tax to 1% of the property's assessed value and limited the increase in assessed value to no more than 2% per year unless the property changed ownership.

This legislation was enacted in response to rapidly increasing property taxes during the 1970s. It aimed to provide significant tax relief to homeowners, especially the elderly, by preventing sudden and steep increases in property taxes.

In addition to its immediate tax restrictions, Prop 13 also permitted property owners to transfer their properties to heirs without resetting the property taxes, thereby extending the benefits of property tax protections to future generations.

How Does Prop 19 Affect the Protections Found in Prop 13?

While Prop 19 does not end Prop 13, it does end some of its protections, namely property tax reassessment exemptions on parent-child and grandparent-grandchild property transfers. In particular, Prop 19 narrows the scope of Prop 13's tax benefits by requiring that inherited homes not used as primary residences be reassessed at market value.

Therefore, Prop 19 removes protections in cases where:

  • Your child/children live on the property after you're gone
  • The property is a cabin or vacation home
  • The property is a rental or business property

Prop 19 and the Elimination of Prop 58

Another significant aspect of Prop 19 is its effect on Proposition 58, which previously allowed primary residences to be transferred between parents and their children (or grandparents to grandchildren, under certain conditions) with no change in property taxes.

This measure was an extension of Prop 13’s intent to protect families from sharp increases in property taxes. However, Prop 19 discontinues these Prop 58 provisions, fundamentally altering California's landscape for intergenerational property transfers.

With Prop 19, the following comes into effect:

  • A primary residence may pass to children with some property tax protections on the first $1m of the property’s market value, but only if the children reside in the residence.
  • All other inherited property, including rental, business, and vacation properties, are fully reassessed with no exceptions.

What Prop 19 Might Mean for You

With the enactment of Prop 19, homeowners in California may need to reassess their estate planning and the future of their property taxes, especially when considering the transfer of their homes to their heirs. If your home serves as your primary residence and you plan on passing it on to your children who intend to live there, the impact may be minimal—your children could benefit from continued property tax protections on the first $1 million of the home's assessed value.

However, if your home is not used as their primary residence or serves as an income or investment property, it would be subject to a market value reassessment, potentially leading to a significant increase in property taxes. This may affect the feasibility of keeping these properties within the family.

Prop 19's changes introduce critical considerations for homeowners when planning for the future of their real estate assets. Understanding these new rules is vital for making informed decisions and seeking alternative strategies for asset protection to mitigate increased tax burdens.

Watch our YouTube video, “Prop 19 Explained | The END of Prop 13 and What it Means for You,” to learn more about how Prop 19 might affect your estate planning. 

Navigating Estate Planning Post-Prop 19: Mistakes to Avoid

In light of Prop 19's implications on property tax reassessment for intergenerational transfers, strategic estate planning becomes paramount to minimize unintended tax consequences and financial burdens.

Common mistakes that you should work to avoid include:

  • Prematurely adding your child to the title: Making your child a partial owner or joint tenant might seem like a straightforward way to ensure continuity, but it can trigger immediate tax reassessment and reduce your control over the property.
  • Gifting property prior to death: Transferring ownership through a gift while you are still alive not only forfeits the step-up in basis for capital gains tax purposes but could also result in an immediate property tax reassessment under Prop 19’s regulations.
  • Oversimplified estate plans: Directly bequeathing your property to your children without considering the nuances of Prop 19 may result in a loss of valuable property tax exemptions. In the face of these new complexities, more than a simple will or trust might be required.
  • Using entities without professional legal guidance: Holding your property within an LLC, corporation, or limited partnership without understanding the implications can lead to unfavorable property tax reassessment. Likewise, forming a trust without addressing the nuances of Prop 19, capital gains, and estate taxes can be a costly oversight.
  • Lack of planning: Simply doing nothing and hoping for the best exposes your estate to potential property tax hikes and may force your heirs to sell the property due to an unaffordable tax burden.

Given these potential pitfalls, consulting with experienced estate planning professionals, like ours at Gilfix & La Poll Associates LLP, who understand the intricacies of Prop 19, can make a world of difference now and in the future.

Potential methods for managing inherited properties post-Prop 19:

  • Instruct your child to make the property they inherit their primary residence; children must move into the property within one year of inheriting it to receive the protections on up to $1m of the property's fair market value.
  • Your children can sell the property after you pass and take advantage of the step-up basis and only have to pay minimal (possibly no) capital gains taxes.
  • If you want to leave your property to a long-time partner, get married; there are no property tax reassessments when leaving property to a spouse.
  • Consult with an estate planning attorney and plan well in advance.

We have helped hundreds of California families to protect low property taxes for the next generation. We have developed a sophisticated set of tools for every type of family situation to optimize for: Property taxes, capital gains taxes, and estate taxes.

The “return on investment” for Prop 19 property tax planning can be truly extraordinary. However, this type of planning requires a longer-term, team-based approach. 

Contact our law firm today to see how you can join our growing community of families who have acted to preserve their family properties for the next generation.

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