Proposition 13 & Property Tax Transfers: What California Homeowners Need to Know

California homeowners know that property taxes can feel like a moving target. Between changing rules and new propositions, understanding how these laws affect your estate can be confusing. 

At Desert Law Group, we’re here to clear up the confusion, especially when it comes to Proposition 13 and Proposition 19. 

These laws significantly impact how property taxes are calculated and transferred. Understanding them is key to preserving wealth and protecting your family’s legacy.

This guide will break down what you need to know about Proposition 13, its transfer rules, and the changes introduced by Proposition 19. We’ll also explore strategies for minimizing potential tax increases.

What is Proposition 13?

Proposition 13, passed in 1978, was a game-changer for California homeowners. It capped annual property tax increases at 2%, based on the property’s assessed value, not its fair market value. 

This “base year value assessment” locks in a lower taxable value when you purchase a property, creating long-term savings while you own the property.

However, things can get tricky when ownership changes. A property is typically reassessed to its current market value when sold, gifted, or inherited, potentially resulting in a much higher property tax bill for the new owner.

Transfer Rules and Exclusions

When it comes to transferring property, Proposition 13 and its updates have created specific rules and exclusions. Here’s what you need to know.

Parent-to-Child Transfers

Originally, Proposition 13 allowed parents to transfer property to their children without triggering a reassessment. However, Proposition 19, enacted in 2021, made significant changes:

  • Only primary residences can be transferred without reassessment.
  • The child must make the home their primary residence.
  • If the home’s market value exceeds the assessed value by more than $1 million, the difference is reassessed.

Let’s break that down with an example. If your parents’ home is worth $1.8 million but assessed at $300,000, only $1 million over the $300,000 is excluded. The remaining $500,000 would be reassessed, raising the taxable value.

For families with multiple children inheriting a home, things can get more complex. Questions about how long the primary residence requirement applies and whether all children must live in the home remain murky.

Spouse-to-Spouse Transfers

The good news here is that transfers between spouses are exempt from reassessment. This applies to transfers due to death, divorce, or other reasons.

Transfers for Homeowners 55 and Older

Before Proposition 19, older homeowners could transfer their tax base within the same county (Proposition 60) or to certain counties (Proposition 90). Proposition 19 expanded this significantly:

  • Transfers are allowed anywhere in California.
  • Replacement properties must be purchased within two years.
  • If the new home costs more than the old one, the tax base is adjusted upward to account for the difference.
  • Homeowners over 55, those with disabilities, and victims of natural disasters can use this rule up to three times in their lifetime.

Other Transfers

Certain other transfers, such as those involving trusts or LLCs, may qualify for exclusions, but the rules can be complex. Always check the latest requirements to avoid surprises.

The Impact of Proposition 19

Proposition 19 brought significant changes to property tax rules in California, reshaping how families and homeowners handle transfers and exclusions. One of the most notable shifts involves parent-to-child property transfers. 

Under the old rules, parents could transfer any property to their children without reassessment, keeping the lower tax base intact. Now, Proposition 19 limits this benefit to the family’s primary residence, and even then, the child must use the property as their primary home. 

If the home’s market value exceeds the original assessed value by more than $1 million, the excess is reassessed, potentially leading to higher taxes.

For homeowners aged 55 and older, Proposition 19 offers expanded opportunities. Previously, transferring a property’s tax base was restricted to the same county or a handful of other counties under Propositions 60 and 90. 

Proposition 19 allows these transfers statewide, giving homeowners greater flexibility to relocate without losing their tax benefits. Homeowners can now transfer their base value to a more expensive property, although there’s an adjustment for the price difference. 

Additionally, eligible homeowners can use this transfer up to three times, compared to just once under the old rules.

These changes aim to balance family inheritance concerns with broader tax reform goals. However, they also create new challenges for families trying to maintain inherited properties, making proactive planning more important than ever. 

Understanding how these changes affect your situation can help you make informed decisions and avoid unnecessary costs.

Advanced Planning Considerations

Proper planning can make a huge difference when it comes to managing property taxes and preserving your assets. Here are a few strategies to consider that could help you stay ahead.

Using a Family Property LLC

Creating a Family Property LLC can be a smart way to manage property and potentially avoid property tax reassessment. This is especially useful for families with substantial assets who want to maintain lower property tax rates while ensuring smooth management across generations. However, setting up an LLC requires careful planning to meet legal and tax requirements.

Avoiding Common Mistakes

Simple errors can lead to costly reassessments. For instance:

  • Improper Titling: If property titles don’t match the trust’s terms, it could trigger a reassessment.
  • Missed Deadlines: Filing the necessary forms on time is critical to securing tax exclusions.
  • Incomplete Beneficiary Designations: Trusts and estate plans must be updated regularly to avoid conflicts and mistakes.

Double-checking these details can save you from headaches and unexpected costs.

Lifetime Gifting A Home

Gifting property during your lifetime may seem like a straightforward solution, but it comes with trade-offs:

  • Carryover Basis: The recipient inherits your tax basis, which could result in higher capital gains taxes if they sell the property.
  • Step-Up in Basis Loss: If the property is transferred after death instead, beneficiaries receive a stepped-up basis, potentially reducing capital gains.
  • Gift Tax Implications: Lifetime gifts could trigger gift tax, depending on the property’s value and your lifetime exemption.

Balancing these factors is essential to decide whether gifting is the right move for your family.

Proposition Base Year Value Transfers

Proposition 13 allows you to transfer your property’s base year value under specific circumstances, such as:

  • Eminent Domain: If your property is taken for public use.
  • Disaster Relief: When your home is damaged or destroyed by a natural disaster.
  • Environmental Issues: Properties affected by contamination may qualify.

Each situation requires careful documentation and timely applications to ensure eligibility. Missing these steps could mean losing valuable tax benefits.

By addressing these advanced planning options, you can better protect your assets and reduce the risk of unexpected financial surprises.

Protecting Your Legacy with Desert Law Group

At Desert Law Group, we understand how confusing property tax rules can be. That’s why we take the time to explain them clearly and develop customized strategies for your unique situation. Whether it’s ensuring your children can keep the family home or helping you move without losing your tax base, our team is here to help.

Don’t leave your family’s future to chance. Call us at 760-239-5661 or reach out via our online form to schedule a consultation today. Let us help you protect your legacy and preserve your wealth for generations to come.

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