Late last week, Sand Hill's Chief Investment Officer Brenda Vingiello, CFA, joined the CNBC Halftime Report panel once again. In the below clip, Brenda addressesread more
California’s Proposition 19 Institutes New Property Tax and Transfer Rules
In the November 2020 election, California voters narrowly passed Proposition 19, a measure that impacts two major areas related to property tax and property transfer. First, it gives homeowners more flexibility to change residences anywhere within California while retaining their property tax base as long as the new home is purchased within two years of the original home’s sale. Importantly, this can now be done up to three times in their lifetime, whereas Proposition 60 previously only allowed for it once per lifetime if transferring within participating counties in California. To qualify, the homeowners must be either 55 or older, disabled, or have lost their home due to a wildfire or other natural disaster. This portion of Prop. 19 has an effective date of April 1, 2021.
Prop. 19 also significantly impacts the treatment of property taxes on inherited property, with only family farms exempted. Previously, Prop. 13 (passed in 1978) and Prop. 58 (passed in 1984) prevented a property tax reassessment for parent to child property transfers at death. With the passage of this new measure, this is no longer the case. Any real estate transfer will now be subject to a property tax reassessment upon transfer, unless the child retains the property and makes it their primary residence within one year of the transfer. Importantly, the measure impacts all commercial real estate and rental property transfers as well. These will be subject to property tax reassessment to current market value as of the date of transfer. Be aware that even if a property is retained as the primary residence of the child, a partial property tax reassessment could still be implemented as determined by a complex formula. In the most basic terms, if the difference between the assessed property tax basis and the current market value at the time of transfer is more than $1 million, then a portion will be reassessed. If the delta between these two values is $1 million or less, then no reassessment will apply. This section of Prop. 19 has an effective date that is coming very soon: February 16, 2021.
Most of the revenue generated by Prop. 19 will benefit wildfire fighting efforts. Specifically, 75% will go to the Fire Response Fund and 15% to the County Revenue Protection Fund. For more clarity on the specific rules, the California State Board of Equalization has published a breakdown of current law compared to what will go into effect as a result of Prop. 19. You can access their site here: https://www.boe.ca.gov/prop19/
With very little time remaining before the effective date of the new inheritance rules, the looming question is “What can I do now?” Each family handles inheritance differently and the make-up of the family structure will also have an impact here. If there is a sole heir who intends to sell the property once it is inherited, then Prop. 19 would not impact those plans. However, if the heir wants to retain the property for any purpose other than their primary residence, or if there are multiple heirs involved, we recommend that you connect with your estate planning attorney as soon as possible to start strategizing what, if anything, can be done before the 2/16/2021 effective date arrives. Utilization of irrevocable trusts or other legal entities are possible options, as is immediately gifting the property to the heirs, although both of these options could come with unintended consequences so they should be fully considered with the help of a professional before proceeding. For example, a current gift could mean missing out on a step-up in cost basis at the death of the giftor since they would be prematurely removing the asset from their taxable estate. Parents could also be required to pay rent to the kids if they continue living in their home once the transfer has been completed.
Since this is a complicated issue with a looming deadline, we encourage clients to consult with their team of professional advisors to sort out the best path forward. We at Sand Hill can help coordinate this conversation between the tax advisor, estate planning attorney and possibly a qualified real estate attorney. But the clock is certainly ticking!
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.