Spinnaker Investment Group CEO, Morgan Christen, sits down with Estate and Business Law Attorney Nicole Anderson to learn more about Prop 19, how it is changing property transfers in California and how individuals can prepare for the future.

Morgan Christen: Nicole, we have received inquiries from clients on Proposition 19. What are the benefits to Californians?

Nicole Anderson: Before Prop 19, only homeowners buying and selling within the same county could take advantage of property tax base transfers. For homeowners who were buying and selling across counties, only ten counties allowed property tax basis transfers. Importantly, these transfers were subject to price restrictions and could only be done one time.

Proposition 19 removes all location and price restrictions to allow homeowners who are 55 or older, severely disabled, or victims of wildfires or natural disasters to:

• Purchase a replacement home anywhere in California and transfer the taxable value of their current home, allowing them to realize significant annual property tax savings. Purchasing a more expensive home will result in an adjusted tax increase based on the original property’s Prop 13 tax basis.
  Move closer to family or medical care, purchase a home that better meets their needs, replace a fire-damaged home, or retire or relocate anywhere in the state while receiving tax savings.
  Save substantially in annual property taxes when moving to a replacement home, even if the replacement home is more expensive than the original primary residence.

MC: How were transfers done prior to Prop 19?

NA: Prior to California’s enactment of Proposition 19, which took effect on February 16, 2021, parents could transfer their residence of any assessed value to their child, and other California real estate (vacation, rental and business property) of up to $1,000,000 of pre-reassessed value, either during the parent’s life or upon the parent’s death, and the child would inherit the parent’s property tax basis in the real estate regardless of the residence’s fair market value on the date of transfer, and regardless of whether the child used the residence as their personal residence after the transfer. But in November 2020, California voted on and passed Proposition 19, which removed that version of the parent-child property tax reassessment exemption from the table. With Proposition 19, the new rule as of February 16, 2021 is that a parent can still transfer their primary residence to their child, but the child must use the residence as their own primary residence after the transfer. There is no longer exemption available for transfers of real estate that are not used as the parent’s principal residence. And that isn’t the only new provision. In addition to the primary residence requirement, the property tax may still be reassessed if the fair market value of the property at the time of the transfer exceeds the parent’s assessed value by more than $1,000,000. If the fair market value of the residence at the time of the transfer does exceed the parent’s assessed value by more than $1,000,000, then the child’s assessed value is the current fair market value of the property less $1,000,000. While that is quite technical, the takeaway is that with the change in the law, avoidance of property tax reassessment on a transfer between a parent and child is now much harder to achieve and, even, if possible, may not result in full avoidance of reassessment.

MC: What can individuals do to prepare for future property transfer?

NA: There may be opportunities to transfer California real estate without property tax reassessment via a series of transfers from parent to child. By way of one example, say parent owns 100% a commercial property located in California. Parent can create a limited liability company (LLC) of which parent is the sole member and transfer parent’s ownership interest in the real property into the LLC without causing reassessment. Thereafter, parent can gift a 50% interest in the LLC to parent’s child. This does not cause reassessment as there is no change in control of the entity – no one received more than a 50% interest in the entity. Two years later, parent and child could dissolve the LLC with each taking a 50% tenants in common interest in the property. This again avoids reassessment as the transfer is proportional. A year later, parent and child could file a new deed, owning the property as joint tenants, which again does not cause reassessment but does cause each to become an Original Transferor for property tax transfer purposes. Upon parent’s death, child is the sole remaining owner of the property, and there would be no reassessment of the property as all property has vested in an Original Transferor.

There are risks involved to the above example, though. If parent dies before all of the transfers take place, it may cause partial reassessment of the property. There is also greater risk of a lawsuit effecting the owners of the real estate if the real estate is not owned in a business entity or protective trust. Another risk is if parent and child die together – the property may end up going through the costly, time-consuming, and public probate process. And there is also a risk that the county would argue that all of the steps should be conflated and ignored via the Step Transaction Doctrine and try to reassess the property anyway.

Trying to delay property tax reassessment is a complicated matter and should only be undertaken with the advice of a professional.