Proposition 19 Set to End Major Property Tax Exemption

Written by Rachel Ronca

Proposition 19 will essentially end your ability to transfer real estate to your children free of property tax reassessment.[1]  If you have a legacy property that you intend to pass to the next generation (regardless of whether it is your home, or it is a rental, commercial or industrial property), you must act quickly.

Generally, when real estate changes ownership, the property will be reassessed to market value for property tax purposes. Under current law, there are certain exemptions to reassessment. One exemption permits a transferor to pass (1) a principal residence (regardless of value), and (2) an additional $1,000,000 in assessed value of other real estate (note that a property’s assessed value – the value shown on the property tax bill – is often much less than fair market value), to his or her children free of property tax reassessment.  Certain grandchildren with deceased parents may also be eligible for this exemption.  These transfers can occur as lifetime gifts or upon the transferor’s death.

When an intra-family property transfer is exempt from property tax reassessment, it means that the child will continue to pay property taxes at the same rate as the parent.  The transferee child can hold onto the property and use it as a residence (principal or otherwise), rental property, or commercial property (if relevant), subject only to the standard 2% annual increase in property taxes.  When a property is instead reassessed upon a transfer, it means that the property taxes will be levied on the fair market value at the date of transfer, often leading to a drastic increase in property taxes.

Under Proposition 19, the exemptions afforded to intra-family property transfers will be ended, or greatly limited.  First, the exemption from reassessment for up to $1,000,000 in assessed value of property other than a principal residence transferred from parent to child will vanish.  Second, the transfer of a principal residence from parent to child must meet new requirements and the transfer may only be partially exempt.  The new requirements are as follows: (1) the child must continue to use the property as his or her personal residence as evidenced under penalty of perjury, and (2) if the fair market value of the residence upon transfer exceeds the parent’s assessed value plus $1,000,000, then the property will be partially reassessed.

Accordingly, it is no longer guaranteed that the transfer of a principal residence from parent to child will be entirely exempt from property tax reassessment, and the transfer of all other property will certainly trigger a property tax reassessment.  This is likely to significantly increase the property tax due on your home and other property when transferred to the next generation.  Often such increases can be prohibitive and require the next generation to sell the property.

Proposition 19 will go into effect on February 16, 2021.  If you are contemplating a transfer of your real estate to the next generation, do not wait.  If you have an active Qualified Personal Residence Trust, your plan may require modification.  Schedule an appointment with the Trusts & Estates Department at MSK today in order to utilize the current exemptions before they are gone.

[1] As of the date of this post (11/10/2020), with 87% of the vote counted, Prop 19 has a 51.2% “Yes” vote.

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