In the recent election, California’s Proposition 19 was passed. The new law, which takes effect on February 16 of next year, changes property taxation on primary residences and other residential properties owned by families.
Current law states that when a primary residence is transferred to a child or grandchild, the property maintains its value for the purposes of determining property taxes. In addition, up to $1 million in additional property, such as a vacation home, can also be transferred while retaining the same tax basis and without triggering an increase in taxation.
Beginning February 16, 2021, any primary residence, including a family farm, transferred to a child or grandchild will only retain its tax basis if it becomes that child’s residence. No allowance will be made for the transfer of additional property, and properties will consequently be reassessed for property tax purposes to the current market value.
If you have a low-assessed value on your primary residence or, likewise, on a vacation home that you would like to retain in the family, this may affect you. If you do not transfer title to your children or grandchildren before February 16, 2021, then you will miss out on the opportunity for them to maintain the lower-assessed value at the time you pass away. This could have a great impact on your family, in that their annual property taxes could increase dramatically.
However, in the case that you expect your family might sell the property, you may not want to transfer title before you pass away. If you transfer title before death, you transfer the cost basis as well. If you transfer cost basis, then you are losing the opportunity for a stepped-up basis when you die. If family is likely to sell a property that you have owned for many years, then they would be better off receiving the property with a stepped-up basis after you die.
This is a detailed issue that pushes you in one direction while pulling in another at the same time. You may maintain low property taxes, but sacrifice stepped-up basis. Or, you may keep your stepped-up basis, but your family would lose the low-assessed value for property tax purposes.
This is where planning can make a big difference. If this potentially affects your plans for transfer to your heirs, please reach out to your tax professional and your estate planning attorney to discuss, and determine if you should do something before the deadline. If you do not have an estate planning attorney, please let us know and we would be happy to introduce you to someone.
We are not attorneys or tax professionals, but we understand your planning… So, as always, if you have questions or would just like to talk it through before calling an attorney, please let us know.