Author: Rhonda Morgan
Prop 19 Overview and How It Affects Property Owners
California Proposition 19, also known as “the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment,” squeaked through the ballot box on November third with 51% of the vote. When it takes effect February 16, 2021, the tax effects on a transfer of one’s tax base of their primary residence to a new residence will be broader, but the ability to transfer California real property to children and grandchildren will change drastically.
The Goal of Prop 19 – Providing Property Tax Benefits for Seniors
Prior to Proposition 19, disabled persons, those over 55 years old and those whose homes were destroyed by natural disasters had a one-time option to transfer the assessed value of their primary residence to another property of equal or lesser market value within the same county. Prop 19 added upon this incentive in the following ways:
- No longer will the new property have to be of equal or lesser value than their existing home subject to a pro-rata adjustment in assessment.
- The new property does not have to be in the same county as the existing property (many counties already had reciprocal agreements allowing such transfers).
- Disabled persons and those over 55 years old can use this exemption up to three times in their life.
The Downside of Proposition 19 – Loss of Most Reassessment Exclusions for Transfers Between Parent/Child and Grandparent/Grandchild*
While the expanded ability to transfer one’s tax base to a new primary residence can be beneficial, the details of Prop 19 reveal some potential unfavorable tax changes, especially those planning for the next generation. Prop 19 changes the transfer of an estate in the following ways:
- The reassessment exclusion only applies to the primary residence of the transferor, additional real property will no longer be exempt from reassessment when transferred between parent/child or grandparent/grandchild.
- The parent/child or grandparent/grandchild receiving the primary residence must also use it as his or her primary residence to avoid reassessment.
- Only the assessed value of the principal residence plus an additional $1,000,000 of the current fair market value of the principal residence will be excluded from reassessment.
What Are Your Options if You’re Affected by Proposition 19
Given these changes, it is important to reassess one’s options for inter-generational transfer of property to assess your options and determine if action is necessary. After consulting a professional, if it makes sense, a transfer of property can take place before February 16, 2021, when Prop 19 takes effect, potentially avoiding the effects of the changes brought by Prop 19. You should immediately consult with your financial and legal advisors to determine whether an immediate transfer of some or all of your real property to your children or grandchildren is right for you.
- Outright Transfers
These transfers can be undertaken as an outright transfer of property in the form of a quitclaim or grant deed. Quick, inexpensive and easy, this method may be an acceptable choice for some. This option is not without its negatives though. The transferor loses all control of the property, including the right to live there or collect rents from it. The property would also be exposed to any judgments against the receiver, such as divorce decrees or tax seizures. Finally, an outright transfer can result in additional capital gains taxes owed by the receiver upon a later sale and usage of some of the transferor’s estate and gift tax exemption allowance.
- Trust Transfers
Another option is to transfer the property to a trust either through gift or sale. When utilizing a trust, the child or grandchild becomes the beneficiary of the property in the trust, while the transferor may retain some control rights through the trustee role. Trusts can be structured in a variety of ways and tailored to the unique needs of your situation. It is important to consult with your financial and legal advisors to determine which structure is best for you.
- Other Transfer Options
There are other options, such as transfer of partial interests in property and transfers utilizing limited liability company interests. Again, you should consult with your personal financial and legal advisors to determine what structure works best for you.
Previous Planning Pitfalls
Reassessment of real property takes place on a “change of ownership”. If the would-be transferor previously transferred property but retained an estate for life or term of years in the property; the transfer is not complete until that right ends. So trusts such as Medi-Cal planning trusts, QPRTS and other trusts or deeds where a life estate was retained did not result in an immediate change of ownership and will not be entitled to the previous exclusions if the effective transfer date is after February 15, 2021. . In instances where one of these arrangements exist, one may still be able to gift or disclaim their retained interest before February 16.
How EP Wealth Advisors Can Help You with Prop 19
A skilled financial advisor can work with you to move quickly through the process of evaluating your situation, creating a potential course of action, and working with your personal tax or legal advisor to help build a strategy and work with these professionals on implementation..
* Transfers between grandparent/grandchild were and continue to be excluded from reassessment on the same basis as parent/child transfers where the parent(s) of the grandchild are deceased.
EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data included in this report. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are subject to change without notice.
Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
EPWA is not in the business of providing legal services, preparing legal documents or furnishing legal advice. Always consult your attorney or a legal professional regarding your specific situation and prior to implementing any strategy or topic discussed or referenced here.
The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors will satisfy your financial services requirements. Services offered by other advisors may align more to your specific needs.
The uniqueness of a clients or prospective clients’ situation will determine the type of services needed and the professionals required to fulfill them. There is no guarantee or warrantee that the services offered by EPWA or any of its affiliates or partners will satisfy the distinctive service requirements of any client. Services offered by other advisors and/or professionals may align more to the specific needs of clients.
All investment strategies, including the one referenced here, have the potential for profit or loss. Investments and investment strategies involve varying degrees of risk, and there can be no assurance that any investment or strategy will be suitable or profitable.
EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.