By Deborah Keesey
Disclaimer: The information provided below is intended to provide general and summary information about Proposition 19. It is not intended to be a legal interpretation or official guidance, or relied upon for any purpose, but is instead a summary of information. If there is a conflict between the information provided here and any legal authorities implementing or interpreting the proposition, the text of the proposition and the other implementing or interpretive authorities prevail.
Recently, the Los Angeles Assessor’s Office has requested that trust and estate practitioners submit questions regarding Proposition 19 (its meaning, its implantation, etc.) directly to the Assessor. Email messages may be sent to: APublicAffairs@assessor.lacounty.gov with the title/subject of the email, “Proposition 19 Questions.”
Proposition 19 was narrowly approved by voters last November which offered a new tax revenue stream for the state and benefits for some of its vulnerable residents, but some argued that it disproportionately benefited the wealthy, white residents and disadvantaged people of color and lower-income Californians.
Others were surprised by the intricacies contained in Proposition 19 which took effect on February 16, 2021. The voters of California approved Proposition 19 on November 3, 2020, which, in part, added Section 2.1 to Article XIII A of the California Constitution. Proposition 19 benefitted older California residents and victims of wildfire and natural disasters who wish to sell their existing homes, and placed limitations on inherited property for tax reassessment.
For the older residents and disaster victims, the new law made it more affordable to move around. Proposition 19 provides that an owner of a primary residence who is over 55 years of age, severely disabled, or a victim of a wildfire or natural disaster to transfer the taxable value of the primary residence to a replacement primary residence anywhere in California with the following qualifications. The home must be purchased or newly constructed within 2 years but can be of any value with an upward adjustment for a more expensive replacement. The property tax base for such properties can be transferred up to three times for persons over 55 years old or with severe disabilities, and once for wildfire or disaster victims. The ability to carryover their existing property tax basis (with the caveats) multiple times effectively gives retirees the freedom and affordability to move around the entire state with ease.
For the beneficiaries of an inheritance, the new law placed more restrictions on the ability to gain favorable tax advantages. First some background: Proposition 13 created California’s underlying real property tax system in 1978. Proposition 13 restricted the ad valorem tax rate to 1% of the property’s value on the date of purchase thereby establishing the base year value, which is the sale price of the property. There would be no reassessment until the property is sold or construction is done. The idea was to relieve homeowners from significant increases to property taxes, but it has also been widely criticized for reducing the state’s revenue. Under certain conditions, Proposition 58 and 193 allowed parents or grandparents to transfer their tax basis on real property to the child or grandchild, which effectively kept the beneficiaries property tax liability the same as the parent’s or grandparent’s because their was no reassessment.
Proposition 19 addresses the criticisms of Proposition 13. For inherited properties, Proposition 19 limits the parent-to-child or grandparent-to-grandchild exemption previously afforded by Propositions 58 and 193. Proposition 19 essentially expanded the qualifications for the transfer of a property’s taxable value. The child or grandchild can keep the taxable value of inherited property at the level as the parent’s or grandparent’s if the property is the principal residence of the child or grandchild and was the principal residence of the parent or grandparent, and the homeowner’s exemption is claimed within one year of the transfer to the child or grandchild. The value limit is the current taxable value plus $1,000,000 (as annually adjusted.) This means that if a child/grandchild chooses to keep the real property and use it as the child’s/grandchild’s primary residence, then up to $1 million of the reassessed value will be excluded from the new property-tax basis.
Still questions linger as to cut-off dates for submitted claims, which properties qualify, along with other restrictions. Some of these questions were addressed by the State Board of Equalization, Property Tax Department, as follows:
1. What cutoff date(s) will there be for clients with investment property transfers from parent to child to submit their claims for exclusion from reassessment on investment property (i.e., 2/15/20)?
Proposition 19 provides that the provisions of article XIII A, section (h) apply to transfers that occur on or before February 15, 2021. Thus, the parent-child exclusion under Proposition 58 (California Constitution article XIII A, section 2(h); and RTC section 63.1) will apply to a transfer or change in ownership of real property between a parent and a child that occurs on or before February 15, 2021. This would also include a transfer due to a date of death that occurs on or before February 15, 2021. Section 63 provides that the claim for exclusion must be filed with the County Assessor within three years of the date of transfer or before a transfer to a third party, in order for the exclusion to be applied as of the date of the parent-child transfer.
2. Will investment properties qualify if the claim for reassessment exclusion is filed before the cutoff date (2/16/2021), but processed after the cutoff date?
As long as the date of transfer or change in ownership of real property between parent and child occurs on or before February 15, 2021 and a claim for exclusion is timely filed, as described previously, it does not matter when the claim for exclusion is processed.
3. How will parent to child transferees prove the subject property is owner-occupied?
Section 2.1 (c)(5)(A) of article XIII A requires a transferee to file a claim for the homeowner’s or disabled veteran’s exemption within one year of the date of transfer. The County Assessor will process the claim for the homeowners’ or disabled veterans’ exemption as they would any other claim for either exemption. If the County Assessor needs verification, they will ask for proof such as voter registration, vehicle registration, bank statements, and/or income tax returns.
4. Will these properties be reassessed if the property is no longer owner-occupied after some time period, or is there a certain amount of time the property must be owner occupied?
Proposition 19 is not clear on this issue. This issue, and many other unclarified issues, will need to be resolved through future legislation.
New legislation has been introduced to delay and clarify Proposition 19’s implementation. Senator Patricia Bates, R-Laguna Niguel, introduced Senate Bill 668, which would delay implementation of the property inheritance provision for 2 additional years. Senator Robert M. Hertberg, D-Van Nuys, introduced Senate Bill 539 which would clarify how county assessors could administer the new law.
The confusion over Proposition 19 has prompted the Los Angeles Assessor to solicit your questions to help clarify the intricacies of the application and understanding of the new law.
Hansen Seto Keesey, LLP