As an Orange County estate planning attorney, I've had numerous clients contact our law office, concerned about the effects of Proposition 19. To help people understand this sometimes confusing proposition, we've answered some of the most frequently asked questions, including how this new amendment will affect your property taxes as well as your beneficiaries.
In November 2020, California voters narrowly approved Proposition 19. The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act is an amendment that produces two significant changes in property taxes.
For starters, it provides Californians over the age of 54, and others, a significant tax break when buying a new home. To retain their parent's low property taxes, beneficiaries will have to make the inherited property their principal residence.
Let's take a look at each of these impactful changes that are now in effect.
In California, thanks to Proposition 13, properties are taxed based on their assessed value instead of the fair market value. This value is based on the purchase price, cost of improvements, and an increase of no more than 2% per year. With housing costs in California appreciating rapidly, many homeowners pay significantly lower taxes on their current residence than if they purchased the same home today.
California has one of the highest average property tax rates in the nation, with only nine states coming in higher. The average tax rate is 0.74%, with Orange County's effective property tax rate set at 0.68%.
An estate planning attorney Orange County CA can let you know how your estate plan will be affected by the passing of this law.
Californians who are 55 and older, have severe disabilities, or lost their home in a natural disaster such as a wildfire received property tax breaks with the passing of Proposition 19. Previously, homeowners could transfer their property tax assessments only once in their lifetime and only within their county or nine other participating counties in California.
To transfer the taxable value of their existing home, their new home had to be of equal or lesser value.
Under those restraints, if a person wanted to downsize their home as they got older and move from Southern to Northern California to be with their son or daughter, they may have been faced with a significantly increased property tax burden.
For example, a home that a Californian purchased for $200,000 thirty years ago is now worth $1 million. If such a person were to sell and purchase a home for more than $500,000, their property taxes would more than double.
Under the new amendment, qualified homeowners may transfer their property tax assessments to a new home anywhere in the state and up to three times in their lifetime. The new replacement home may cost up to $1 million more than their existing home.
Homeowners must purchase the new property within two years of the sale of their original home.
In essence, it allows qualified individuals to purchase a new home anywhere in the state of California and retain their relatively low property taxes, if applicable.
Before Proposition 19 passed, your estate planning attorney in Orange County may have advised you to speak with them to make changes to your estate plan while the more favorable rules were in effect. The restrictive new laws regarding the property taxes paid by beneficiaries have since gone into effect on February 16, 2021.
The new law mostly eliminated the parents' and grandparents' exclusion from property reassessment when passing on their property to their children and grandchildren under certain conditions.
Before this date, parents could transfer their principal residence to their children without triggering a reassessment. As an example, if a parent left their home to their children, the beneficiaries could retain their parent's property tax rates and still use the property as a rental or vacation home.
The previous law also allowed children to inherit the property assessments of residential or commercial properties valued up to an additional $1 million.
Under the new law, the inherited property must be the principal residence of the parents or grandparents and valued at no more than $1 million above the current assessed value. Additionally, the property must become the child's or grandchild's primary residence within one year of ownership for them to qualify for their parent's property tax rates.
Otherwise, the property will be reassessed and, due to current property values, the property taxes could be significantly higher.
Ultimately, children inheriting property from their parents may decide to sell the property rather than face significant property taxes. For instance, if the parent's bought a rental property for $100,000 decades ago, and that property is now worth $1 million, the children will be faced with paying property taxes on the current value.
Contact an Orange County estate planning lawyer to determine how this new law may affect you and your family.
Due to the recent changes, it's important to establish your estate plan or have your existing plan reviewed. In addition to changing California laws, some experts believe that the new administration may reduce the deficit by lowering the estate tax exclusion and increasing the tax rates on transferred properties.
The current $11.7 million estate tax exemption and gift tax exemption may be reduced to $3.5 million for estates and $1 million for gifts. Additionally, the tax rate on transfers over those amounts may increase from a flat rate of 40% to adjusted rates based on the estate's value.
While this change affects a small percentage of Americans, several other laws are being considered that will have far broader consequences. At Parker Law Offices, we're committed to helping you protect your family's estate. For a complimentary consultation, contact us at Parker Law Offices today.