Negative Ramifications of Prop 19

Many people will experience a negative impact from Prop. 19, since it considerably limits the availability of the parent-child exclusion for purposes of real estate tax assessments and the resulting property-tax consequences. Prior to Prop. 19’s passage, parents could transfer a primary residence to children without any new fair-market reassessment, regardless of how the children chose to use the real property. Effectively, this would allow children to avail themselves of the same property tax basis that their parents enjoyed. Additionally, any secondary property, such as a vacation home, rental property or commercial property, could be transferred with up to $1 million of the assessed value being exempt from the increase in property taxes — again, regardless of its use by the children. Beginning Feb. 16, children who inherit real property from their parents will have to factor in increased property taxes in the decision to keep or sell the property. If a child chooses to keep the real property and use it as the child’s primary residence, then up to $1 million of the reassessed value will be excluded from the new property-tax basis. (Before, primary residences could be transferred with no cap.) If the child chooses to keep the property as a second home, vacation home or rental property (anything other than as the child’s primary residence), there is no $1 million exclusion and the child will face a significant increase in property taxes. For example, if parents purchased a rental property in 1940 for $50,000, and the value of the rental property is more than $1 million when it is transferred to a child after Feb. 16, the parents’ tax basis does not pass to the child. The child will now have to pay property taxes based on the assessed fair market value, which will significantly affect the child’s decision to keep or sell.

For more information regarding how Prop 19 could impact your real property, please contact Home & Deal at 844-580-0001 or email@homeanddeal.com.