Prop 19, a property tax increase for real estate heirs, is seen as a simple “erosion” of Prop 13 and is on the horizon. Many outlets including WealthManagement.com report that this may have a serious impact on future plans if you are considering passing on real estate to your children.
“Prop 19 contains two important changes in California property tax assessments, one of which will financially impact many estates if action isn’t taken immediately.”WealthManagement.com
One of the provisions that will influence a considerable impact are changes being made to parent-child exclusion. Prop 19 will greatly limit the availability of parent-child exclusion for real estate tax assessments. The changes will be in effect beginning Feb. 16. This places a burden on an owner who wishes to leave real estate to their children after they pass. They will also need to take into consideration if their children can even afford the property taxes alone if it is reassessed to current market values; They may need to consider leaving more assets—if any—to their children.
“If your client plans on finding a way to work around this new law, they need to do so immediately.”
As it stands, the law states that a property’s value for tax assessment purposes are not to be reassessed when children inherit principle residences from their parents. This includes the ability to leave a principle residence to a single child or multiple children regardless of its new use. Meaning, the children don’t even have to continue using it as a principle residence. The property’s value won’t be reassessed even if used as a rental or vacation home.
Furthermore, current law ensures that the first $1 million of assessed value of a real property may be excluded from tax assessment.
“For transfers occurring after Feb. 15, 2021, the parent-child exclusion is limited to transfers of a principal residence as well as to certain farm property. The child or children must use the residence as their own principal residence.”
If the children do not use the home as a principle residence then, under Prop 19, the property is subject to reassessment and property taxes can soar as the home reaches current market value.