California voters recently passed Proposition 19. This new law goes into effect on February 16, 2021, and will increase property taxes on some California real estate over time. As a result of the changes we wanted to share a summary so you can plan accordingly.

The proposition has two primary features:

1. Increased Property Taxes on Inherited Homes

Prior to Prop 19, a child, and in some instances a grandchild, inheriting a property would also inherit the property tax rate paid by the parent. This enhanced the benefit of inherited real estate by retaining lower operating costs.

Prop 19 does away with that rule. Under the new law property tax rates will be reassessed unless two conditions are present:

  • The beneficiaries use the home as their primary residence.
    For example, if a parent passes on their home and the child rents it out or uses it as a second home, the property tax value will be reassessed.
  • The property’s “assessed value” does not exceed the fair market value by more than $1 million dollars.
    For highly appreciated properties, property taxes will adjust upward but will not be fully reassessed. For example, if the property was assessed at $1 million before the transfer, but its market value at the time of transfer is $2.5 million, the new assessed value will be $1.5 million (the current value minus the $1 million exemption).

In addition, the property taxes of commercial or other income-producing properties will be subject to reassessment upon death of the owner.

For options to potentially avoid these future property tax increases, consult with your estate attorney.

2. Ability to Move and Take Your Property Tax Rate

Before Prop 19, residents over the age of 55 were allowed to transfer their property taxes one time if they moved to one of a select few California counties and purchased a home of equal or lesser value.

After Prop 19, eligible owners, which include those over age 55, severely disabled, or the victim of a natural disaster, are allowed to move anywhere in the state up to three times to a home of lesser value and bring their property tax assessment with them. The hope is this change will enable some to move who were otherwise reluctant to move due to a property tax increase.

In addition, if you purchase a more expensive home in California, Prop 19 allows you to blend the taxable value of your old house with the purchase price of the new home (also up to three times). The result is a much lower property tax than prior to Prop 19.

Prop 19 is expected to raise tens of millions of dollars in the first few years. Over time this could grow to a few hundred million dollars per year. This money will mostly be directed to the California Fire Response Fund, with some money also flowing to public schools and local governments.

If you are planning to pass on or inherit property with a low property tax base, we encourage you to start working with an estate planning attorney soon. This is especially important as many people are restructuring their estate plans to maintain property taxes prior to the changes going into effect.

If you have any questions, please let us know.

Thank you,
Opes Wealth Management

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