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. 

Posted by & filed under Asset Protection, Community Property Agreement, Retirement Planning.

Did you know that many real estate professionals who handle the titling of real property assets for same-sex couples many times are ignorant of titling rules for those couples? 

This is a subset of the law in California that same-sex couples must be aware of even if they’ve been cohabitating for many years.  Married same-sex couples who have been together a long time, but only recently legally married, will not have community property and will lose the significant tax benefits on the death of the first spouse unless they make certain decisions to protect their community property assets.

Same-Sex Couples & Community Property Rights

When you are planning your estate you might not think about how your living arrangements may affect it.  For example, if you have lived with someone for a long time and have had a lifetime partnership with them, sharing the expenses and purchasing a home together, you would think that would be the same as a normal married couple. 

However, it’s actually not.  There are different laws that apply for people that have had a long term relationship but are not actually married.  This also, sadly, is how it is for many of our married gay couples.

When you buy a house together you think of it as community property.  Community property means that it is both yours equally.  Community property is everything that is purchased during the marriage. However, if you waited a long time to be married, then the rules are different. 

Because the marriage of gay couples wasn’t even possible until recently under California law, there are many same-sex couples finding out that they, in fact, don’t have the rights they thought they had.  We are seeing more and more of this costly mistake and want to make people aware.  There is a document that you can sign that will make the property community called a “community property agreement”.  This is something that you need to discuss with your estate planning attorney.

Why You Need a Community Property Agreement

So, let’s try to break this down a bit and hopefully help better explain it.  Let’s say you own a rental property with your partner that is now worth $1,000,000.  You both agree to sell the property.  You purchased the property many years prior for $200K, and so upon sale of the property you would have to pay capital gains tax on $800K. (The cost basis is $200,000.  If this was depreciated rental property, the cost basis would be as low as zero.)  When someone dies, their share gets a 100% stepped-up basis.  If the property is jointly owned, such as joint tenancy or tenants in common, 1/2 the property would get a stepped-up basis of $500,000.

But – and this is the important part – for community property, the surviving spouse gets a 100% step-up on the entire property, so this property would be stepped up to $1,000,000.  This means it can (1) be sold without capital gains tax or (2) be depreciated all over again, meaning a huge annual income tax deduction for the surviving spouse.

The concern is that same-sex couples who have been together for many years but only just recently married, will not have their assets properly designated as community property.  This can be fixed by getting a signed community property agreement.

Clearing Up The Confusion of Step-Up Rules

There are a lot of confusing rules about the stepped-up basis.  However, you can have all of your questions answered by speaking with an estate planning attorney who is an expert about these rules. 

Take the time to do some research on this, and if you find it difficult to understand make an appointment with The Law Offices of Joel A Harris.  Don’t leave a tax mess for your spouse or long term partner.

The Law Offices of Joel A Harris are more than prepared to provide you with legal counsel. Joel Harris is an attorney with 30 years of experience and is extremely familiar with how the law affects same-sex couples and their rights. If you are not sure how to begin, or you just want some help navigating the ins and outs of protecting your retirement and estate, feel free to visit us online, in person or call us by phone at (925) 757-4605.