With the passage of Proposition 19, California property owners face new challenges and opportunities in estate planning, particularly regarding property tax reassessment. Here’s what you need to know to effectively plan for these changes, including increased property taxes:
1. Understanding Proposition 19:
Effective February 16, 2021, Proposition 19 significantly altered the rules for property tax reassessment, especially for intergenerational transfers. The proposition limits the parent-child exclusion to primary residences and imposes a cap on the exclusion amount.
2. Primary Residence Transfers
Under Proposition 19, the parent-child exclusion from reassessment is now limited to the transfer of a primary residence, provided the child continues to use it as their primary residence. The exclusion applies up to a market value of $1 million above the property’s assessed value.
3. Impact on Rental and Investment Properties
The previous exclusion for non-primary residences, such as rental or vacation properties, has been eliminated. These properties will be reassessed at current market value upon transfer to heirs, potentially increasing property taxes significantly.
4. Planning Strategies:
Trusts: Consider using trusts to manage property transfers and potentially mitigate tax impacts. However, note that trusts do not inherently prevent reassessment unless specific conditions are met.
Gifting and Ownership Structures: Explore gifting strategies and ownership structures, such as Family Limited Partnerships (FLPs) or LLCs, to manage property interests and potentially leverage valuation discounts. There are creative ways to keep low property tax base by using LLCs and other entity rules.
5. Do you need to do a PROP 19 Planning Review?
Given the complexity of these changes, it is crucial to engage in expert planning to leverage available tax saving strategies if keeping real property in the family long-term is a goal.