Hot Estate Planning Issue: CA Prop 19

Impacts property transfers between family members and changes property tax rules

HVP Law Offices

Were you planning to leave your primary residence or other property to your children or grandchildren in your living trust or will? Proposition 19, which recently passed by 51% on the November ballot, is changing the reassessment exclusion between parents and children as we know it.

You need to make some important decisions quickly.. If you act now, you can transfer property to your children without triggering a reassessment. You can transfer a primary residence of any market value as long as the assessed value is under one million dollars, and you can transfer any other type of real property (land, commercial or second home) to your children as long as the assessed value is under one million dollars. You must make the transfer and fill out the exclusion form. We can help.

Considerations With Prop. 19 – This may not be a straightforward decision. HVP Law Partner, Thomas A. Haeuser, certified specialist in Estate Planning, Trust and Probate Law, stresses for clients in general with Prop 19 just “don’t plan on kids getting anything except your primary residence and then only if they want to live in it as their primary residence. While some urge transferring of property before Proposition 19’s upcoming February deadline, doing so without a full understanding of the issues may leave certain estates vulnerable. It is important to consider the financial implications of the estate and consult your financial planning advisors. In very narrow circumstances a pre-February transfer may be appropriate. This would be when the estate holds a legacy property that the beneficiaries do not intend to sell. Should they intend to eventually sell a property transferred before the February deadline, “Then doing so would subject them to capital gains tax which can be nasty,” concludes Tom.

Prop 19 Pros and Cons (Click to enlarge image)

Talk to Your Financial Advisor – For clients wanting to take advantage of the non-tax transfer before Prop. 19 kicks in then consider consulting your financial advisor. According to Daren Blonski of Sonoma Wealth Advisors, “once a property is transferred it is no longer an asset available as part of a portfolio. A decision to transfer property before death must be considered in light of the overall strength of the portfolio but also the various tax implications as well.”

Transfers need to occur prior to February 15, 2021, to record your transfer. On February 16, if you transfer property to your children, the exclusion will not be granted for property other than your primary residence. What happens if you transfer your primary residence after the deadline? Your house needs to legitimately become your children’s primary residence to qualify for the new parent-to-child exclusion form. How cozy all of you living together. Even then the property will be reassessed, not all the way to market value but the value of the residence will be increased using a real estate price index and then taxed on that value, which will be revalued every year!

Transferring now versus when you pass away may not afford your children the step-up in basis (the difference between acquisition price and market value on the date of death) and they may have to pay more capital gains taxes if they were to eventually sell, it may be worth it. Depending on the type of property, the holding period, the known and projected appreciation of real estate it may make sense to transfer an income property to them. If you know one of your kids wants the family home to live in one day or all of the kids want it for potential rental income, you may want to transfer now. CNBC reports that it is Joe Biden’s intention to “… levy a tax on the unrealized appreciation of assets passed on at death” so the death of the step-up in basis is coming anyway!

Talk to a Realtor – if you want to sell property in your estate, you may consider selling off those properties. Currently, according to probate realtor Chelsie Runnings of Better Homes & Gardens, “the lack of available housing coupled with the pent-up demand and current low interest rates has kept home prices skyrocketing.” Prop-19 will result in higher property taxes, so, according to Chelsie, “keeping inherited homes as rental properties or second homes will likely become unprofitable spurring real estate owners to sell.” Thus, you may want to consult an experienced realtor.

In happier news, if you decide to “downsize” and move out of your cozy home after April Fool’s Day 2021, you can choose any county in California not just the handfuls of Counties that would accept the transfer of your base year value already. Ah, but you can’t leave your base year value and take it with you too. You will need to transfer the base year value to your new digs and then transfer it to the kids. Physically you just can’t get away from those kids after February 15, 2020.

Give us a call and we can help you with your next move, even it’s only on paper. (707.996.2131 | mary@hvplawoffices.com)