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California Just Changed the Rules

By Richard Schooley


Prop 19 Will Impact Wealth Transfer

Estate planning should be on everyone’s To Do list, especially with federal tax law changes to wealth transfer expected soon. However, if you live in California, updating your estate plan should be moved up a notch because of the passage of Prop 19 which takes effect this month. 

Landscape in the Rose Garden residential neighborhood of San Jose, California

In November, Prop. 19 passed with a 51.1% majority vote. The new law has a profound effect on transferring homes to your heirs, as well as rental or commercial properties. Previously, family members could transfer a home and the property value would not be reassessed. This was a significant benefit because of California’s Prop 13 from 1978 that limited property tax assessments. Unfortunately, that is no longer true. Prop 19 also closed the $1 million exemption loophole on assessed value when transferring rental or commercial properties. 

Let’s Unpack the New Law

The new law has two parts. Homeowners who are 55 or older or those homeowners who lost their home in a natural disaster like the recent fires in California, are able to transfer their tax assessment to a new home. The new home’s current tax assessment will be added to the value of the new home if it is more expensive. Homeowners have two years to sell their current home and buy a new one. They can also take advantage of a transfer like this three times. 

The second aspect of the new law that takes effect on February 16, 2021 eliminates the ability for a home to pass from a parent to a child or grandchild without reassessing the home value unless it is the primary residence of the child or grandchild. If the child or grandchild does not live in the home or chooses to rent it to others, the tax value can be reassessed. 

You can imagine the challenges to current estate plans, especially if a family has multiple heirs. Children will no longer be able to inherit their parents’ or grandparents’ homes and maintain the low tax liability if they choose to keep the home as a vacation or rental property. This change can be demonstrated with the “Lebowski loophole” that was based on the Los Angeles Times investigative report that found Jeff Bridges (The Dude in the “The Great Lebowski”), his brother Beau Bridges and their sister were paying $5,700 a year in property taxes for the home they inherited from their parents — a Malibu home with private beach access and panoramic views of the Pacific Ocean. None of the siblings lived in the home, bought by their parents in the 1950’s, but were instead renting it for $15,000 a month. According to the LA Times, if the $6.8 million dollar home were sold, the new owners would have to pay $76,000 in property taxes. 

Another Wrinkle

Prop 19 also included a “principal residence exclusion” of $1 million. What that means is if you have a home in San Jose worth $2 million and it passes to a child who lives in it as their primary residence, the first million dollars of value are exempt; however, the child will have to pay current property tax rates on the second million.

There are strategies, like gifting a home to a trust, that could prove beneficial. What is most important now is to review your estate plan to determine the best path forward for you and your family. We’re here to help. 

Your family financial health is the goal.

The simple, powerful reason to focus on your financial health is to take good care of yourself and the ones you love. We’ll help you do both.