There are winners and loser in every piece of legislation. On this past election day, a slim majority of California voters passed Proposition 19. The winners: firefighters who will receive funds from the projected new tax revenue; and wildfire victims, severely disabled, and homeowners over 55 who wish to move within California. The losers: California residents who intended to pass their homes, and other real property, to their heirs.
The Good
Existing California law provides a property tax break to allow seniors to downsize without having their property tax bills skyrocket. When they moved, (inside of their current county, or to one of the exempted California counties), they could take their existing property tax rate with them, provided it was to a home of equal or lesser value. For one move.
The new law expands this property tax rate transfer to homeowners 55 and older, the severely disabled, or the victims of a wildfire. It also allows them to do this statewide for up to three moves. Nice.
The Bad & the Ugly
The tradeoff for these more favorable property tax rules is less favorable rules for those who intended to pass their real property to their children and grandchildren. Since 1978, Californians wishing to pass their homes, rentals, and business real estate to their heirs have enjoyed a unique property tax system. This system not only allows them to pay property taxes based on the original purchase price, but allows them to pass that favorable rate on to their children and grandchildren. So, no increased property tax rates regardless of home appreciation.
The new rules severely limit this. First, the passing of these favorable rates now only applies to one’s primary residence, not vacation homes or commercial property. Second, your named beneficiaries (all you name), must move into the home within a year. If not, your heirs will pay market value in property taxes.
Also, if a vacation home, rental, or business is involved, you will still get a break, but only the first $1 million of assessed value (not fair market value) may be excluded from a property tax assessment.
The Ugly
So you may be wondering, “how might this affect me?” Well, if you have some understanding of estate planning, you know that one of its chief concerns is balancing the estate, property, capital gains, gift, and income tax rules to maximize the amounts passed to your heirs, and minizine the taxes paid upon your passing. If you are a middle-class California family, a significant portion of your wealth is likely tied up in your home. This rule change then eliminates one of the major tools that has been used in the past decades for passing wealth to the next generation.
Also, if you have an existing qualified personal residence trust (QPRT), you may have been planning to remain in the house for a fixed term and then pay rent to the beneficiaries (your kids) until you pass. It’s a good strategy for many as it reduces both estate taxes and can provide your children with a stream of income until you pass. However, under the new law, your heirs would need to use the residence as their primary residence, or it would trigger reassessment.
Takeaway
If you wish to pass your California real property to your children or grandchildren, you have until February 15, 2021 to do so and still allow them to keep your favorable property tax rate(s). If you have more questions about your existing estate plan, or how to structure a new plan, Contact CASHMAN LAW today for a free consultation to get the Plan You Deserve.™
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