How Proposition 19 Changed California's Intergenerational Transfer Benefits

Common Scenario

An elderly Grandfather, who is sadly now a widower, lives alone in his primary residence in Simi Valley, California. Along with trying to stay relatively active by tending to his late wife’s beloved flower garden, he also tries to spend as much time as possible with his grandchildren.

The home was bought in the 1990s for $200,000 and is worth about $800,000 now. The increase in property value had given him and his wife various financial opportunities over the years, but now that he is retired, he doesn’t expect to do much with the equity and hopes to pass on this home and the rest of his estate to his 2 adult children.

Both adult children live in their respective homes in nearby cities, but only one of them is married with children.

He hopes that on his passing, the home does not lose its Proposition 13 base year value, which was originally $200,000, through a property value reassessment.

Let’s Talk About Property Tax Assessment

In California, real property taxes are based on their purchase price, may not exceed 1% of the property value and cannot rise beyond the rate of inflation that the Consumer Price Index measures, which limit is 2% per year.

In 2020, Proposition 19 was passed by California voters and went into effect in February and April of 2021. This new law changed two programs that are administered by county assessors:

1. Parent-Child / Grandparent-Grandchild Transfer (aka Intergenerational Transfers)

2. Senior Citizen and Disaster Relief Tax Base Transfers.

In light of our sweet elderly grandfather example above, we will focus on the Intergenerational Transfer section of the law.

But first, it’s only prudent for us to briefly summarize the other provisions of Prop. 19.

Transfer of Property Value Assessment to a Replacement Property (55 years and older & disabled)

The new law allows eligible homeowners to transfer (up to three times over their lifetimes) the taxable value of their existing primary residence to a new replacement primary residence of any value (subject to limitations), and anywhere within the state – modifying the old provision that limited such a transfer of taxable value to once, and only within 10 participating counties in California.

Disaster Relief Tax Base Transfers

Proposition 19 allows homeowners to purchase a replacement home of greater value than their original home and transfer their tax base with an adjustment to account for the value difference in cases of homes destroyed by wildfires or other natural disasters.

Intergenerational Transfers:

Finally, parent(s) and grandparent(s) can transfer their property along with its Proposition 13 base year value to their children or grandchildren if the following conditions are met:

1. The property must be the principal residence of the parent(s) or grandparent(s)

2. The property must become the principal residence of the child or grandchild within one year,

3. Only the principal residence of a parent(s) or grandparent(s) qualifies for a base year value transfer. Other property, residential or commercial no longer qualify for this benefit.

4. The property is worth less than the total of the property’s base year value plus $1 million.

Wait What???

Ok, let's apply the Intergenerational Transfer part of the new law to our example above.

Rent or Sell – Reassessment Applies

In the above hypothetical, upon Grandfather’s passing, and absent specific instructions in his Will or Trust, his living heirs will have to decide what to do with the house. Will they rent it out and turn it into an income-producing property, or will they sell it?

In either of these scenarios, renting out or selling, Prop. 19 will force a reassessment of the property value upon change of ownership – meaning it will now be assessed at the current fair market value of $800,000, not $200,000.

Child Moves In and Makes it Their Primary Residence – No Reassessment (unless exceeding value limit)

So what if the adult children really don’t want to lose this house? Perhaps the unmarried child may decide that she wants to move into her parents’ house and make it her primary residence. If she does in fact transfer the property to her name and within one year claims the homeowner’s exemption, then she may avoid having the house reassessed, thus carrying over the original assessed value of $200,000.

There is also a value limit of the current taxable value plus $1 million if the child does make it her principal residence. So if the house were now worth $1.5 million (instead of $800,000), then the calculation of the assessment would lead to a new assessed value of $500,000 (instead of the original $200,000).

Continual Use by Child as Primary Residence

Over the past year and a half, there have been further guidance letters issued by the State Board of Equalization to County Assessors, regarding the continual use of a transferred property by the child as their primary residence.

In other words, what if the single daughter changed her mind after 3 years of living in her parents’ house, and decided to move?

According to a BOE letter dated February 2022,

“another requirement is that a family home must be continually used as a family home by an eligible transferee or subsequent eligible transferee in order to maintain the intergenerational transfer exclusion.”

Otherwise, a whole new calculation will be used to reassess the property starting with the date of the initial change in ownership from parent to child.

Bottom line, there is a lot to consider for homeowners who have been carrying a low assessed value of their primary residence.

The above summary and examples do not cover other situations, such as grandparent to grandchild transfers (if parent is deceased), daisy-chain LLC solutions for high net-worth clients who want to prevent reassessment of property for future generations, and blended assessments for new property that is purchased at a higher value.

Based on each family’s unique situation, there may not be much that can be done to avoid a property reassessment. Perhaps the “step-up in basis” will outweigh the benefit of carrying over an assessed value and it’s a whole different ball-game.

Big-picture planning with your tax advisors and attorney should include these and many other factors, to help you and your loved ones achieve optimal estate planning outcomes.

If you need to speak to me about your estate planning needs, feel free to contact me at 805-424-3131 or visit my website at www.interplaylegal.com where you can read more about my services and even book your first connection call.

I provide Estate Planning and Debt Relief Solutions for Your Peace of Mind.

Please note that this blog post was for informational purposes only and does not intend to create nor does it create an attorney-client relationship. Nothing in this post is meant to provide tax or legal advice.