By Ted Gaines
State Board of Equalization
A massive change to property tax law is coming soon that could cost families thousands of dollars a year and affect how parents and grandparents pass down properties through generations.
Proposition 19, passed by California voters last November, makes major adjustments to the “parent-child” and “grandparent-grandchild” exclusions, all to the harm of taxpayers. Prior to Prop. 19, parents and grandparents could transfer their principal residence to a child or grandchild with no value limit and without adjusting the property tax base-year value, meaning that the child or grandchild would not be saddled with a huge new property tax assessment when they became owner. The person receiving the property could live there, rent it out, use it as a second home, or let it sit empty – there were no restrictions on property use to qualify for the exemption.
Prop. 19 changes all of that. Once the new law goes into effect on February 16, 2021, the unlimited value provision disappears. The new formula will be the current taxable value of the property plus one-million dollars. This change will hit many coastal property owners in the pocketbook as they inherit or receive property that appreciated wildly in California’s multi-decade housing boom. Modest homes in Silicon Valley neighborhoods owned and transferred by middle-class families will face stratospheric tax bills under the new regime.
As bad as that will be, it is another provision that is more likely to cause havoc and financial loss for many Californians. Under Prop. 19, a person receiving property under one of these exclusions must now use the property as their primary residence to qualify. That means if you have moved to a different city, you would have to move back and occupy the home to receive the exemption. It means that if you are happy with your current home, you would have to give it up and move to qualify for the exemption.
The date these changes go into effect is right around the corner. If you are planning on transferring property to a child or grandchild, please be aware of the very different landscape that awaits you and them after February 16.
There are a thousand unanswered questions regarding these changes that are not clarified in the proposition language. What happens if multiple children receive a property but only one makes it a primary residence, for example? What happens if someone qualifies for the exclusion, then moves out of the primary residence for a time, then moves back in? Does the exemption kick back in or is it lost forever? It was an initiative written with little concern for detail.
Proposition 19 does provide some new and welcome benefits for California taxpayers, most notably that it allows certain property owners to transfer their base-year tax assessment to all 58 counties. This allows homeowners who want to downsize, move closer to their children, or relocate for any other reason to keep a lower property tax. Prior to Prop. 19, that benefit was only available within counties or in a handful of counties that accepted base-year transfers. Taxpayers can now also use that transfer provision three times instead of the one-time, geographically limited use in prior law.
Although I favor the base-year transfer provisions, I oppose this new tax increase, which will take hundreds of millions of dollars a year from Californians inheriting their family’s biggest asset. But it’s now the law, and as a Board of Equalization Member and taxpayer advocate, I will be seeking to identify every area where Prop. 19 is unclear and am committed to working with the legislature, county assessors, tax professionals and taxpayers to ensure effective administration of this new law.
Visit my website at boe.ca.gov/gaines for more information on Prop. 19 and for examples of how the new law would affect passed-down properties. Please consult a qualified attorney or tax professional for advice on transferring any property.
Senator Ted Gaines (Ret.) was elected to represent the Board of Equalization’s First District. He is a leading taxpayer advocate and is committed to providing trustworthy and transparent representation for nearly ten million constituents in 30 counties of northern, eastern, and southern California. For more information, visit boe.ca.gov/Gaines.