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.
You can read our blog on our current legal strategy.