By George Paulsen, Hood & Strong LLP
Is it time to give your children your vacation home or a rental property you own in California? Proposition 19 that just passed suggests it might be the right time.
In the last election Proposition 19 was voted into law. This new law, effective February 15th 2021, makes significant changes to the old Prop 13 and Proposition 58 that Californians have enjoyed for years. The new law adds some flexibility but pays for it with fewer benefits.
Today the law allows an individual to give their primary residence to children or grandchildren and retain the parents’ tax basis. So if the parents owned a home in California and the assessed value is $200,000 and its value today is $2,000,000 then they give it to their child, she can move in or rent it and retain the parents tax base of $200,000. Thereby continuing to pay the same property taxes that her parents paid.
In addition, if mom and dad had a rental property with an assessed value of $1,000,000 or less but it is worth $10,000,000, they can give that property to their children or grandchildren and they can still retain that low tax base. Therefore, they can avoid reassessment where the property tax could go up to over $110,000 annually.
What Happens Now That Prop 19 Passed?
On February 15th of next year all that changes. After that date only a principal residence qualifies for a reduced property tax rate with caveats. The child or grandchild must use the home as their principal residence and the benefit is limited to the extent that the fair market value does not exceed the assessed value by more than $1,000,000.
The old law that allowed once in a lifetime transfer of property tax from an old home to a less expensive new home in a qualifying county has been expanded and effective after April 1,2021. This law was not used often because many counties would not allow the transfer. To get this one time transfer you had to be over 55, disabled, or a victim of a natural disaster.
The new law adds flexibility to the Proposition 58 law. Now those qualifying individuals can move up to three times taking their tax base with them and they can transfer it anywhere in the state. This will be very helpful for wildfire victims and retiring people wanting to downsize and move to a smaller community or closer to family.
With these coming changes families have a little time to help their future generations benefit.
Let’s say that grandma has the home she and her husband bought when their children were little with a tax base of $75,000. The family loves the place, and everyone now uses it. Grandma can gift the cabin to her qualifying grandchild or children that is now worth $1,000,000. If done before the new law goes into effect, the property tax bill of say $850 a year will not go up to over $10,000 per year.
Transferring now would allow the family to continue to enjoy the property at a low family cost for years to come. The same would be true for any other property owned in California with low assessed values compared with the current market value today. If the children or qualifying grandchildren intend to retain the property for a long time after the owners passing, the family should consider transferring now.
What Steps Can You Take?
Reach out to us at AEIS, Inc. at Alyssa@AEISAdvisors.com if you would like to be connected with George Paulsen and his team of tax advisors and CPAs at Hood & Strong, LLP to get advice on your situation.
This post was originally published in Hood & Strong’s Newsletter.
Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.