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?