While it allows more 55+ homeowners to sell and move on a statewide basis, as of April 1, 2021, up to three times taking advantage of the new property tax basis, widely regarded as a good thing, it eliminates past rules about a child inheriting a parent's house. Consider your capital gains exclusion at this point in time, and whether you took title as a joint tenant or as community property with right of survivorship.
Since the new changes for parent/child exclusions come into effect February 16, 2021, this would be the time for some people to review the new law and how it may affect them.
If a new home is purchased at same or lesser value than former home, the former home's taxable value is taken to the new home. But, if a new primary residence is bought, and is of a greater value than the one it's replacing, the new residence's value is added to the prior residence's tax base--it is calculated by adding the difference between the full cash value of the prior home to the full cash value of the new home's taxable value. So if the prior home, with a taxable value of $400,000, sold for $900,000, and the new home was purchased for $1,000,000, your old tax base would carry over, plus the $100,000 difference in value would be reassessed for adding onto your original tax base, making a new taxable value of $500,000 for your new home. So while your property tax will increase, you still benefit by keeping the lower tax base (especially if you bought in 1970s for example), instead of paying the entire current tax rate on a $1,000,000 home.
However, effective February 16, 2021, the parent and grandparent grandchild exclusions from property tax reassessment only apply to transfers of a family home, not investor properties*, and only if the child or grandchild moves into the home within one year of the transfer (and supposedly the way the law reads right now, if there's more than one child, then all children must live in the home to have the exclusion apply). Additionally, under earlier Prop. 58 and Prop. 193, there was no value limit on the parent's principal residence, but NOW under Prop. 19, if the home's current value exceeds its existing tax assessment by more than $1 million, then the excess value is added to the current assessed value to compute a new tax value!! If the new value after transfer to the child does not exceed $1 million, then there's no reassessment. In today's California market that cap of $1 million could affect a lot of properties.
Additionally, if an aging parent moved into a facility and passes away there, not living in the primary home, that home will be assessed at full value of property taxes, so if it's worth $1.7 million in today's market at the time of the parent's death, those taxes could be over $21,000.
* Residential, industrial and commercial rentals and family vacation homes are no longer eligible under Proposition 19. Only principal homes occupied by child or grandchild (meaning child of deceased parents) are included under this Proposition. So if your child is living in one of your rentals, that will no longer work under this Proposition. So while there are many good aspects to this new law, there are other consequences--current homeowners may want to make decisions now in order to minimize future effects.
- You can gift property to your children now, i.e., rentals (but do they want to manage them?), but they will lose the stepped-up basis at the time of your transfer to them, which would mean them getting the parent's adjusted basis and paying capital gains on the new basis and the value at the time of property sale.
- You can do nothing.
- You can in the future buy property and put directly into an LLC.
- Put property into an irrevocable trust (not the same as a living trust).
- Link to Proposition 19 bill
- Link to chart on Proposition 19 at Board of Equalization.
https://longbeachrealestate.blogspot.com/2020/11/what-could-passage-of-proposition-19.html
Julia Huntsman, REALTOR, Broker | www.juliahuntsman.com | 562-896-2609 | California Lic. #01188996
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