Changes in probate and estate laws can have a significant impact on your estate plans. However, changes in tax laws can also positively or negatively impact your estate. Therefore, we strongly recommend periodically discussing your estate plan with our California estate planning attorney, especially after changes in tax laws such as California’s Proposition 19.
Before discussing how Prop 19 can impact your estate plan, it helps to understand how the state of California taxes real estate.
California Real Estate Taxes
California collects a yearly property tax calculated based on one percent of the assessed sale price of the property. Counties can increase property taxes each year to account for inflation. The limit for yearly inflation increases is two percent.
Adding improvements to real estate may trigger a property tax reassessment. The county reassesses the taxes based on the date you complete the improvements.
The most common way the county increases property taxes is by reassessing the value of real estate when it is transferred by sale, death, or gifting.
For more than forty years, an important exclusion to this method of increasing real estate taxes has been through exemptions for transfers of real estate between spouses, from parents to children, from grandparents to grandchildren, or for individuals over 55 years old buying a home.
What is California Proposition 19?
California Proposition 19 is also better known as Prop 19. California voters approved the ballot measure by over 51 percent in November 2020. The measure limits the exemptions for parent-to-child and grandparent-to-child transfers to generate additional county revenue, with some of it dedicated to wildfire relief.
Beginning on February 16, 2021, the exceptions from reassessments for real estate transfers to children from parents and grandparents, and the increases in property tax amounts that often accompany reassessments, became much more limited. Prop 19 resulted in the following changes:
- Property used as vacation rentals or investment property is no longer subject to the exclusion. The county reassesses these properties for property tax purposes even when the property is transferred to a grandchild or a child.
- The county conducts a partial reassessment when the property value increases by more than $1 million. Beginning 2023, the $1 million threshold increases yearly based on inflation.
There are still exclusions for transfers to children or grandchildren who intend to use the home as a primary residence. However, the exclusion only applies to property under the $1 million threshold.
How Can Estate Planning Help Avoid Property Tax Reassessments?
Estate planning offers several potential solutions to this new problem. First, an estate attorney may review your entire estate plan to determine the best ways to protect all assets from taxes and assessments.
Creating an irrevocable trust could be a possible solution to avoid Prop 19 taxes. Transferring the real estate to an irrevocable trust may help avoid Prop 19 issues and may also preserve your step-up basis for capital gains tax benefits. However, the disadvantage of an irrevocable trust is that you lose control over the property. For these reasons, it is best to discuss all options with an experienced California estate planning lawyer to ensure you design a plan that addresses all issues in the best possible manner.
Contact Our California Estate Planning Attorney for More Information
Many factors could affect your estate plan. Discussing your goals and needs with our California estate planning attorney identifies the issues to address now so that you can provide for your family and protect your legacy for future generations. Contact our office today for a free consultation.