New Property Tax Considerations in California
California voters passed Proposition 19 in the November election. This new proposition will bring two big changes to transfer tax laws pertaining to California real property starting February 16, 2021. These changes may affect our California clients who own real property and wish to sell or transfer it. One of the changes pertains to transfers of property from parent to child or grandparent to grandchild. The other change affects seniors, severely disabled individuals and victims of wildfires and natural disasters.
Parent-Child and Grandparent-Grandchild Transfers
Proposition 19 greatly amends the parent-child and grandparent-grandchild exclusion. Previously, under Proposition 58 transfers of a principal residence between parents/grandparents to children/grandchildren were excluded from reassessment for property tax purposes. Specifically, Proposition 58 allowed for an unlimited primary residence exclusion from property tax reassessment and up to $1million of assessed value for other property when a parent-child transfer occurred or qualifying grandparent-grandchild transfer occurred. Beginning February 16, 2021 this exclusion will be substantially limited.
The new proposition states that the transferor must be taking the homeowner’s exemption, and the transferee must also take the homeowner’s exemption within one year of the transfer. This means the child/grandchild must make the home their primary residence within one year from the date of transfer. Not only must the child/grandchild move into the residence, but the amount of the exclusion from reassessment will be limited. Currently, under the parent child exclusion, the transfer of the entire value of the residence does not trigger reassessment of property taxes. Beginning February 16, 2021, the exclusion is limited to the current taxable value of the property plus $1 million (as adjusted annually) of the value of the primary residence. Therefore, if the increase in value of the property is more than $1 million, an adjustment will be made to the property taxes on that increased amount.
Previously, up to $1 million of assessed value per transferor could be transferred without triggering property tax reassessment. Under the new Proposition 19, there is no transfer of additional properties to children or grandchildren without the reassessment of property taxes.
Due to the changes occurring under Proposition 19, clients wishing to pass real property to their children or grandchildren in California should seek advice from counsel immediately to determine if any actions should be take prior to February 16. There are many considerations in determining whether you should transfer property prior to February 16, 2021 including gift tax considerations, tax basis considerations and whether you wish to give up ownership and control. Additionally, the deeds and recordings may take longer than usual due to the Covid-19 crisis, so we recommend you contact your advisors now.
Property Transfers for Seniors, Severely Disabled Individuals and Victims of Wildfires and Natural Disasters
In addition to affecting the parent/child exclusion for property tax reassessment, Proposition 19 also has changes pertaining to individuals over the age of 55. Beginning April 1, 2021 individuals over 55, severely disabled individuals and victims of wildfires or natural disasters may now carryover the assessed value of their current primary residence to a newly purchased residence anywhere in California. This carryover may be used up to three times during an individual’s lifetime for individuals over the age of 55. The new residence must be purchased within two years of the sale of the initial primary residence.
We strive to stay abreast of developments that impact the clients that we serve. If you have any concerns or questions regarding any impact to you, please contact your Boston Private advisor.
This perspective is general information only and does not constitute legal advice. Clients should seek advice of counsel for information on their own situation.
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