The 2020 Election Cycle did not come as a surprise to the millions of voting Americans. However, with everyone’s eyes fixed on who would be the Commander in Chief for the next four years, lawmakers and state governments attempted to catch citizens off guard with propositions that raised taxes while eliminating important processes that have benefited families.
In California, one such example is Proposition 19 which deals with Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment (2020). This piece of legislation is designed to raise taxes on inherited homes by eliminating the parent-child exclusion from reassessment under California Proposition 58.
Under the current law (as stated in California Propositions 13, 58, and 193), property tax rates on residential real property are calculated at a rate of approximately 1% from the purchase value, or the base year of 1975, whichever is more recent. Because of this, many families can keep inherited homes with very low property taxes.
As of Wednesday, November 11, 2020, Proposition 19 is set to pass and become an amendment to the California Constitution, significantly altering the formula used to calculate property taxes. Whenever a change of ownership occurs, the property will automatically get reassessed and be given a new taxable value. This will cause many families who inherit a home from a parent to lose the home because they will be unable to afford the high cost of property taxes.
To best understand the effects of this law change, consider the following example:
Bill and Mary began house hunting for their growing family in 1986. After viewing several different properties, they finally found the perfect 4-bedroom home and purchased it for a total of $175,000. Their property taxes cost approximately $1,750 a year with a 2% increase each year. They owned their house outright by 2006, the same year they made an estate plan. In their Living Trust, they decided to leave their home to their oldest daughter Susan. Thanks to Proposition 58, when Susan inherits the house, she will be able to keep the property tax at the same rate. By 2020, the property taxes would have increased to only $3,400.
Unfortunately, with the passage of Proposition 19, the house would be reassessed when Susan inherits the property. If the assessment shows that the house is worth more than the initial price ($175,000) plus one million dollars (totaling $1,175,000), then Susan would see an exponential increase in her property taxes. Because Bill and Mary took great care of their home and made a few modifications over the years, the value of the home skyrocketed to $2,350,000.
The new taxable value that would be added to the current tax bill would be calculated as follows: New assessed value ($2,300,000) – Original purchase price plus one million dollars ($1,175,000) = the new taxable value (1,125,000)
With property tax rates at approximately one percent, Susan would be charged an additional $11,250 ANNUALLY, bringing her new total to $14,650. For Susan to even be eligible for the formula as described above she must also make the family home her primary residence. The new law also states that all additional properties will automatically be reassessed at their current value with no deductions available. So, if Susan inherited additional property worth $1,500,000, she would automatically have to pay taxes worth $15,000.
If the formula seems convoluted, that’s because it is. California lawmakers and real estate groups worked together to make a complicated system that cheats many good families out of their homes and legacies. Propositions 13 and 58 have helped countless families preserve their family home for their descendants while Proposition 19 eliminates that same opportunity for current and future generations.
Thankfully, there is still time to act! If Prop 19 does pass as it is currently set to do, the law will not go into effect until February 16, 2021. We at Field Law are currently working with new and existing clients to create an Estate Plan that protects your legacy and preserves your family home from unnecessary taxes. If you are interested in learning more about this special offer, CONTACT OUR OFFICE TODAY!