CALIFORNIA PROP. 13 PROTECTIONS, URGENT PROP. 19 STRATEGIES
If you own any real estate in California – residential or otherwise – the property tax caps imposed by Proposition 13 can play a dramatic role in your life.
Unfortunately, few California residents realize just how complex and dramatic that role may be.
For example, it’s tragically easy to accidentally trigger a reassessment under Prop 13 that might increase your property taxes five- or ten-fold, either for yourself or your heirs. It’s also easy to mis-handle a transfer of property during your lifetime, or mis-draft a Living Trust in a way that destroys everyone’s rights to a tax cap worth many thousands a year.
To the delight of tax authorities, people make huge California Prop 13 mistakes every day, simply by failing to understand the complexities of the laws, consulting a qualified attorney, or stepping forward to claim the parent to child reassessment exclusion within applicable deadlines.
Prop 13 has been modified many times and litigated to the point that few understand its intricacies. Even though we deal with Prop 13 issues daily, we must talk constantly with county and state authorities, and frequently consult the 160+ page Assessor’s Handbook “AH401.” (Note: At least for now, this handbook has been removed from the Board of Equalization’s website because of Prop 19. The laws are being rewritten right now.)
Prop. 19 Radically Alters Prop. 13 Rules on Inheritance
The situation has again been dramatically altered by the passage of the landmark California tax Proposition 19 on the November 2020 ballot. Many may have decided to support Prop 19 without realizing its full implications.
When implemented on February 16, 2021, California Prop 19 will, with limited exceptions, eliminate a parent’s ability to leave to their children or grandchildren their Proposition 13 taxes and tax base. All Property will be reassessed at its current fair market value, with one very small exception. Indeed, Proposition 19 should force an urgent rethinking of tax strategies for any property owner with children.
If you receive a property in an inheritance, you must proactively claim your Proposition 13 exclusions—passing on your Prop 13 tax base does not happen automatically.
Quick Summary: What is Prop 13 California?
Proposition 13, which passed overwhelmingly in 1978, was an amendment to the California Constitution which rolled back residential property taxes on a principal residence to 1975 levels, capping them at 1% of assessed value (plus some local additions by county). Assessments were allowed to rise at a maximum of 2% a year—even though real estate prices in California continued to skyrocket.
Properties would be fully reassessed in value only when a change of ownership occurs either by death, gift, or sale. In other words, when the property is “transferred,” or what the California State Board of Equalization calls a “change in ownership.”
That simple formula has been modified in important ways over the years, including the 1986 Proposition 58, which excluded transfers from parents to children from reassessment, and also excluded the first $1 million of assessed value for any type of property transferred to children—including commercial and industrial properties—not just the family home.
Parents could now pass on their tax breaks to their kids on their residence of any amount. For other properties that aren’t the residence, two parents could combine their assessment exclusions to equal $2 million in assessed value being transferred to the children – even though the property might be worth $10M or more. In certain cases, grandparents could also transfer Prop 13 caps to grandchildren.
Later modifications even allowed people over 55 to take their Prop 13 caps with them to a new home, under limited circumstances.
(Note again: some of the above has been altered by Prop 19, which passed in November 2020. See below for the fallout.)
Regardless of changes over the years, the devil has always been in the details. What is a “transfer”? What is a “change in ownership”? Who is a “child”? A “grandchild”? What about sons and daughters-in-law? What about property owned by LLCs? How could Living Trusts be structured to prevent reassessments? How could reassessments be challenged?
As a result, an entire area of law has grown up around Prop 13 protection in California, generally falling under the specialty of Estate Attorneys. Why? Because many Prop 13 California property tax rate issues occur during inheritance transfers. Indeed, financial planners and CPAs rarely understand the full complexity of these tax laws. You need expert advice. You need a savvy estate lawyer.
Proposition 13 California Tax Caps Matter a Lot to a Family’s Intergenerational Wealth–Many Traps Await the Unwary
Here’s a real-life example. A house in Los Angeles County was purchased in 1992 for $475,000. In 2020, that house is now market-valued at about $2.8 million. But thanks to Prop 13, along with the various amendments and political pressures, it’s currently assessed at only $670,615, with an annual property tax of $8,986. If this house were transferred to a relative as part of an estate without proper planning (say to a sibling, or starting February 21, 2021 to a child), it could be reassessed at say $2.5 million, with an annual property tax rate around $35,200 for the unwitting heir! “Hey sis, I’m giving you a house…and a $35,200 a year tax bill.”
Even worse, if the transfer was not properly reported for say 10 years, the recipient might owe back taxes for 10 years at the new rate!
Importantly, recipients of properties must also proactively claim their Prop 13 exclusions—they do not happen automatically, even if you are a child who intends to maintain the property as your primary residence.
Consider Urgent Action Before CA Prop 19 Takes Effect February 16, 2021
The passage of Proposition 19 on the November 2020 ballot radically altered the Prop 13 tax landscape in California, and every California property owner should at least consider taking immediate, urgent action before the law takes effect.
This includes every single-family, multi-family, commercial, or industrial property owner with children or grandchildren. Here at CunnighamLegal, we are offering immediate consultations on these issues.
Up through February 15, 2021, a parent can continue to transfer their home, commercial property, or rental property of any value to their child, and the low Prop 13 capped property taxes will generally transfer with it subject to the above limitations. If transferred prior to implementation of the new law, the child does not have to then live on the property.
But starting on February 16, 2021, the only Prop 13 tax base that can be transferred is that of your primary home to your child—and then your child themselves must live on the property as the owner. If that’s not enough, if the home is worth more than a $1M, the home may be partially or entirely reassessed! A partial or complete loss of your Proposition 13 tax benefit.
In most cases, this will effectively eliminate the ability of a parent to leave a low tax assessment to a child. Why? Because very few people who inherit their parents’ home will actually want to live in that home—and many homes are worth far more than $1M in California. That makes Proposition 19 a huge departure from current California law, with massive consequences for taxpayers who own California real estate.
Commercial Properties Also Affected by Prop 19
Importantly, however, far more than primary residences will be impacted.
Take the case of an office building purchased for $200,000 in 1975 which is now worth around $2M. Under current law, the assessed (and inherited) value is likely $450,000 (per current exemption) with property taxes of $5,600 a year. Under Prop 19, if that property is inherited and re-assessed, the property taxes would rise to about $25,000 per year!
Urgent CA Prop 19 Strategy Advisory During Unique “Twilight Period”
All this means property owners have an extremely short twilight period from now through February 15, 2021 to take certain estate planning steps now to lock-in Prop 13 tax rates for children. It is a once-in-a-lifetime opportunity to dramatically lower property taxes for children destined to inherit any kind of property from parents. This can be an extremely valuable property right. Don’t let it go to waste!
The actual deadline is Feb. 11, 2021 because Feb. 15 is a holiday, and many Recorders’ offices in California are closed Feb. 12-15. Ideally, the transfer will also be recorded before the deadline. However, the Recorder’s office is greatly backed up due to Covid delays.
In response, CunninghamLegal is offering urgent meetings to review your situation and provide expert legal and tax advice on your best Propostition 19 response strategy. In most cases, we can quickly give a definitive recommendation on whether you should consider doing something before February 16. Depending on the issues, these legal advisories could potentially save literal fortunes for your children down the line.
Prop 19 Also Changed the Rules for People Over 55
Prop 19 also changed the law to let eligible homeowners transfer their tax assessments anywhere within California, and lets tax assessments be transferred even to a more expensive home, with an upward adjustment. People over 55 can now do this three times during their life instead of just once. Other eligible people include those with severe disabilities.
Before the election, most of the Prop 19 attention focused on this change to the rules, although the inheritance exclusions will likely have a much greater impact.
Regardless of your situation, we again suggest you work with an attorney during such transfers.
High Chance of Error Demands Expert Legal Advice
We haven’t the space to detail all the ways that people mess up their Proposition 13 assessment caps—even during their lifetimes. If you have the slightest question about a transfer of property in a Living Trust or otherwise, we urge you to consult a competent California attorney. Here are just a few examples of the Proposition 13 mistakes people make:
- You change the title of a house, possibly triggering a reassessment.
- You name multiple beneficiaries in a Living Trust, which includes your house. Some of the beneficiaries are your children and some are not. As a result, the possibility of your children avoiding a reassessment may be lost.
- You move your industrial property into an LLC so you can protect yourself while renting it out, accidentally triggering a reassessment because you didn’t file the right form on time at the assessor’s office.
- Without proper planning, when you die you put your beneficiaries into a “race” to claim the $1M exclusion on a commercial property—since only the first to claim the exclusion may win.
- Your heirs simply don’t know they have to file a claim for reassessment exclusion under Proposition 13 within three years, and they may lose it.
- One parent dies without creating a special trust to preserve their assessment exclusion on properties which are not primary residences. When the second parent dies, the kids miss out on a $2M exemption, and can only get a $1M exemption from that second parent.
- A transfer occurs without proper registration with the state—and 20 years later, the new owner owes 20 years of “supplemental” back taxes at the enormously higher rate. In the Los Angeles example above, think perhaps $26,000 x 20!
- Grandparents don’t realize they can transfer their assessment exclusion to grandchildren—that is, if both parents are deceased and the grandchild did not receive some other residence from their parents.
- People think that they are passing on a “principal residence” but they haven’t lived there for years, and the state objects.
- People think they can pass on the exclusion for a multi-unit property, but they only occupy part of it, and the state objects.
We could go on and on. To make a long story short—the laws are complex, the laws are confusing, the situation is always changing, and the stakes are probably higher than you think.
Please get expert legal advice!
CunninghamLegal provides a comprehensive practice in preserving Proposition 13 caps for you and your family. I urge you to book a consultation immediately, or call us at +1 866.988.3956.
Best, Jim
James Cunningham Jr., Esq.
Founder, CunninghamLegal
We guide savvy, caring families in the protection
and transfer of multi-generational wealth.
Proposition 19 requires an urgent rethinking of tax strategies for any property owner with children or grandchildren.