Posted by & filed under 2021 Changes, Proposition 19.

California’s Proposition 19 - What You Need to Know Now If You Have Property

On November 3, 2020 everyone’s eyes were at the top of the ticket. However, other ballot measures will also have a huge effect on the lives of people in California. Californians this year had a wide array of propositions to vote on, including Proposition 19. Proposition 19 passed 51% to 49% as of November 17, 2020.

What is Proposition 19?

Proposition 19 is a measure to change Props 13 and 58 in California. As you probably know, Proposition 13 passed in 1978 and limited property tax increases to 2% annually unless reassessed due to sale or other transfer. Because of Proposition 13, property tax valuation of properties in California is much less than the actual current market value. Proposition 58, passed in 1986, authorized the owners of property to transfer property to their children and grandchildren with the the same low property tax basis. This affects the personal residence (regardless of value or who will live there) plus $1Million in additional property.

Current California law also allows a qualified homeowner (aged 55 or over, disabled, or a natural disaster victim) to move to a participating in-state county once, and carry the assessed value of their property with them when moving to a home with a lower assessed value.

How Does Proposition 19 Change Property Taxes?

Proposition 19 amends the current legislation adopted in Propositions 13 and 58. It allows qualifying owners (over 55 years of age, physically disabled or natural disaster victims) to move into a house of lesser value up to three times in the State and to carry their lower property tax assessments. This is great news for homeowners, but you should be aware; Proposition 19 also amends the law on inheriting property. Under proposition 19, all real estate will be reassessed at death, with the exception of a primary residence worth less than $1 million that a child actually moves into (if worth over $1M the balance is reassessed).

Again, before Proposition 19 goes into effect on February 16, 2021, property owners can leave or gift their primary residence and up to $1 million in assessed value of other real estate to their children (and qualifying grandchildren) and the assessed value would transfer with the property. Under Proposition 19 the preferential valuation can only be transferred under the following conditions:

How Will This Look for Me?

Let’s look at a case in point:

Amy owns her first home, now worth $2 Million, with an assessed value of $300,000. She pays $3,600 a year in property taxes. The property tax would be approximately $24,000 a year if it were to be reassessed at current fair market value. Amy also has rental home with a cost basis of $250,000 and $1.2 million current valuation. The property taxes Amy pays are $3,000 a year for the rental, but the property tax would be about $14,400 if it was assessed at current fair market value. Amy is planning on leaving her property to her son David.

Before Proposition 19, if Amy dies, David would pay the same property taxes that Amy had been paying, totaling about $6,600 per year. Just as with Amy, property taxes will increase only 2% per year.  After Proposition 19, once the properties pass to David, they will be reassessed to about $26,400 if David moves into the house, or $38,400 if David does not move into Amy’s house.  

What Can You Do Now?

So what do we recommend someone like Amy do? Proposition 19 will go into effect on February 16, 2021, so before that date, Amy should consider transferring one or both properties to David. If Amy does this, David will not face the reassessment to fair market value of the property and would not have to move into Amy’s home.

These assets could be completely transferred to David outright. However, in the event of divorce or if David had other issues, an outright transfer could make the properties vulnerable. Many of these problems could be avoided by transferring the property to a trust for David. Such transfers must be made by February 15, 2021. Any transfers after February 15, 2021 will be subject to the rules of Proposition 19.  There are very serious downsides to making real property gifts. First, you would have to file a gift tax return using part of your $11,580,000 lifetime gift and estate tax credit to avoid paying taxes on this gift. This may be a very good use of the $11,580,000 credit, which is set to drop by 50% in 2025, if not lowered sooner by the new administration.     

The second major consideration is cost basis. When you gift property, the recipient keeps your lower cost basis. When you die, your heirs get a stepped-up basis, which would allow them to sell real property with no capital gains tax, or depreciate income property as it if just purchased. This is a huge tax benefit that must be considered when making gifts. A gifting strategy would clearly work best for a valuable primary residence (worth over $1 Million) that your child plans to live in, then pass along to his or her heirs. You can avoid gift taxes using your lifetime credit, there would be no capital gains tax as the property will not be sold during your child’s lifetime, and your low property taxes have been preserved. 

One possible strategy is available for other property, such as rentals, commercial property and land. Consider transferring the property into a corporation or LLC, then your children or grandchildren can inherit shares of the business and there will be no change of ownership on the actual deed to trigger reassessment. This is a current loophole that the counties will try to close, and may or may not be an effective tool for avoiding reassessment.

Other benefits of this strategy are (1) asset protection (2) advanced gifting opportunities by giving stock/shares (3) possible estate tax reduction in the value of the property owned by the business entity if you do not own 100% of the shares/stock by gifting shares/stock to your heirs, and (4) no February 2021 deadline. This is a complicated and important issue. Proceed carefully and make informed decisions together with your attorney and CPA. Personal residence gifts must be made before February 16, 2021, to take advantage of Prop 13.

Will Proposition 19 affect your family? Consider if it makes sense for you to gift your home or move the property into a trust or business entity.

Still Have Questions? Contact Estate Planning Expert Joel A. Harris

For over 30 years Joel A Harris has been protecting the estates of families throughout California. If you want some help navigating the ins and outs of protecting your estate, feel free to visit us online, in person or call us by phone at (925) 757-4605. 

Problems with Proposition 19

Posted by & filed under Proposition 19.

With election day looming, there are many considerations on our ballot in California. One important box to tick is whether you’ll vote yes or no on Proposition 19.  Proponents say it will encourage residents 55 or older to downsize and eliminate the inheritance tax break, providing billions of dollars to firefighters and municipalities. Those opposed to Prop. 19, however, argue that Realtors are pushing it to increase their commission and heirs should be able to do whatever they want with inherited property without having to face a huge inheritance tax.

The Case Against Proposition 19

If this measure passes, Prop. 19 will remove tax protections Californians have enjoyed since 1986. Previously, when a parent left property to a child upon death, property and inheritance taxes were assessed at the original purchase price. However, should a yes vote come in on this proposition, transferred property would be assessed at current market value, resulting in a huge tax burden in many cases. The only exception would be if the child moves into the home as a principal residence within one year of transfer, which would allow them to continue to enjoy the tax break. 

Prop. 19 and Prop. 13

Many aspects of Proposition 13, passed in 1978, will be eliminated should Proposition 19 pass in 2020. For instance, it eliminates:

  • the protection for most inherited real estate between parents and children
  • the protection for grandchildren if their parents are deceased
  • the protection for primary residences valued at higher than $1 million

 Currently, thanks to Prop. 13, there is a $1 million non-principal lifetime exclusion ($2 million for a married couple), which allows parents to transfer up to $2 million of assessed value of all other property, including second homes, rental homes, and commercial property. Prop. 19 would eliminate this exclusion entirely. The child who inherits must use the property as a principal residence, and the exclusion amount would be capped at $1 million. 

Who Benefits from a Yes Vote

While the detriments of Prop. 19 are many, as with any new suggested legislation, there are always a few benefits. In this case, those aged 55 or older will enjoy a continued reduction in property taxes when moving to a new residence. Currently, homeowners pay property tax on the original value of the home—not its current value—giving them a significant tax break. A yes vote on Prop. 19 will allow seniors and disabled buyers to move their property tax break anywhere in the state. However, this benefit is already available in county and between many counties already, so that wouldn’t represent a change.  

The Impact on Estate Planning

The cost to your heirs may be significant should Proposition 19 pass and you plan to leave them property. Whereas many inheritors now enjoy the benefits of that passed-down property as vacation homes or rental income, they would have to move into the property and make it their primary residence to continue to enjoy the tax break, and only if the residence appraised for less than $1M. Plus, even outside of looking at this proposition from an estate-planning perspective, it will affect all residents. Some families will no longer be able to keep their primary residences since they will not be able to afford the property tax. This is an important time in the history of our country and the history of our state. You, your family, and your heirs stand to lose millions to property taxes should Prop. 19 pass. Are you willing to take that risk? 

Posted by & filed under Proposition 15, taxes.

The repercussions could make a big difference for the state’s businesses and residents.

What a wild year it’s been. COVID-19, wildfires, and political kerfuffles were just the start. Now, with election day fast approaching, we have a lot to consider—not the least of which is your choice for the next president of the United States. In California, we have 12 propositions on our ballot, and one—Proposition 15—threatens to rollback a 42-year-old California Constitutional amendment.

Exploring Proposition 15

At its essence, Proposition 15 will impose steep property taxes on business, which will, in turn, raise billions of dollars for schools and local governments. On the surface, that sounds like a great payoff. After all, businesses make lots of money, right? What’s the negative of taxing them more?

If California’s Proposition 15 passes, though, it will be one of the biggest tax hikes in the state’s history. More than that, if voters choose to push the measure through, it will change property tax laws that have been in place since 1978. That’s because Proposition 15 is closely related to Proposition 13, “which established the concepts of a base year value for property tax assessments and limitations on the tax rate and assessment increase for real property.”

Because of those limitations established 42 years ago, business owners pay property taxes based on the original price they paid for the property (plus inflation adjustments), which especially here in California, is usually a lot less than its current value. By passing this legislation, property taxes for many businesses will skyrocket.

Estimates are that a “yes” vote on Proposition 15 will result in $6.5 to $11.5 billion (yes, with a B) to be split between municipalities and schools, with schools appearing to be last in line.

Only businesses would be directly affected by the change. Homeowners will not see an increase in property tax, and agricultural property will be unaffected.

The Tie to Proposition 13

California is often a leader in national policy, and Prop. 13 was no exception. Since its passing, other states have taken steps to limit how quickly property values can be reassessed. Currently, commercial and industrial property tax is based on the original purchase price with annual increases capped at 2% or equal to the rate of inflation, whichever is lower.

If Proposition 15 were to pass, it would essentially reverse Proposition 13.

Why a Yes Vote on Prop. 15 Is a Bad Thing

While there is no indication that residential property taxes would be affected, even if Proposition 15 were to pass, that doesn’t mean that many residents of California won’t feel the brunt of such a new law, should it take effect.

Consider that, if businesses have to pay higher taxes, they need to make up that loss elsewhere (most leases pass the property tax burden to the tenant). That means price increases for products and services statewide, cut employee hours, or even layoffs. Some businesses will close or leave California.

In addition to real estate taxes, Prop 15 also increases the taxes on business non-real property, equipment, machinery, improvements and more.

While a yes vote on Proposition 15 would be a detriment to the state’s economy at any time, it could be especially devastating in 2020, when we are already in one of the worst economic situations we’ve seen in generations. Californians simply can’t afford to weather this kind of sweeping increase in commercial property taxes.

What Should I Do Now?   

You need to have a knowledgeable estate planning attorney on your team so you can make wise choices about your money—now and after you’re gone.  The Law Offices of Joel A Harris are more than prepared to provide you with legal counsel pertaining to your planning, execution, or, and any other legal concerns or questions you may have. The Law Offices of Joel A Harris, located in Concord, Walnut Creek, and Antioch are available to help you to the best of their abilities. Joel Harris is an attorney with over 25 years of experience and is extremely familiar with this process. If you are not sure how to begin, or you just want a few questions answered, feel free to visit us online, in person or call us by phone at (925) 757-4605.