Dear Clients,
As you know, California voters recently passed proposition 19 by a bare majority about 51% to 49%. It was advertised under the guise of helping wildfire victims and seniors, but it has severely gutted the benefits available to families in transferring property to their children and descendants. You may not now as easily avoid reassessment of the property during this process. We wanted to send you out a synopsis of the law, both before and after the passage of proposition 19, so that you can assess your options going forward.
In short, prior to the passage of proposition 19, there were broader exemptions allowing you to transfer your personal residence, as well as other properties, to your children or descendants.
With respect to the property used as your principal residence, you could transfer the property (having any value, no limit) to your children free of any tax reassessment. Once received, the children could do whatever they wanted with the property, and could rent it if they wished. The property would retain the same old tax base. It passed entirely free of reassessment. To some degree, you could also give a personal residence to grandchildren, but only if the child who was the parent of that grandchild was deceased.
Outside of the personal residence, you could leave other residential or commercial properties to your children. There would be no tax reassessment for these transfers provided that the properties did not exceed $1 million In “assessed” value (this is the value of the property as listed on the tax bill). If the old assessed values did not exceed $1 million, the properties would pass tax-free. If assessed value of transferred property, as listed on the tax bills, exceeded $1 million, there would be a limited reassessment.
With the passage of proposition 19, the ability to transfer a residence free of reassessment is severely limited, and the ability to transfer non-residential properties was taken away entirely.
Effective on February 16, 2021, in order to transfer a personal residence free of tax, a child now has to use that property as his or her own personal residence. Even then, only $1 million is given as an exemption against fair market value. If the property transferred to the child has appreciated by more than $1 million, the child will be reassessed by the excess amount.
Protections for transfers of non-residential properties to children have been taken away entirely. All such transfers will be reassessed according to fair market value, after February 16, 2021.
So, what is to be done? Could you transfer properties to your children now, in advance of February 16, 2021? You need to carefully check with your accountant, because there are other tax consequences. The biggest concern has to do with capital gains. If you have highly appreciated property, you could transfer that property to a child, but through that “gifting” the child takes your existing tax “basis” in the property. This is the value at which you acquired the property, and capital gains taxes are measured from this tax basis. However, if you were to wait and pass the property to a child after your death, existing law gives the child a “stepped up“ tax basis in the property, which would be its value on the date of your death. With a “stepped up” tax basis, if the child sold the property later, much of the capital gains would be wiped out. If the child takes a gift of the property while you are alive, they may pay a much higher capital gains tax if the property is sold, because they would be measuring from your original tax basis.
In addition, if you make a gift now, the value of that gift would have to be declared on a gift tax return, filed with the IRS, and you would use up a portion of your lifetime estate tax exemption. That exemption is now over $11.5 million. For many people, they would not hesitate to make a substantial gift and use up a little of that exemption. However, you have to keep the child’s capital gains taxes also in mind.
Thus, for each family, the math may be different. To lower a child’s property taxes, you may be increasing the child’s capital gains taxes. Trading one tax for another, the government always gets its share.
We are considering different strategies to assist our clients and making the best plans possible. All of us must recognize that each case, family status and financial priorities are unique and require subjective analysis. We will be in touch with any further developments in this regard.
