New proposal threatens California’s real estate tax haven

Homeowners have seen the value of their homes increase dramatically in most parts of the country over the past few decades, and in most cases the assessed property tax value has kept pace with the increase in the actual value of the property it -same. But not in California.

The reason is Proposition 13, which was approved by California voters in 1978, sparking a national debate about the overbreadth of the property tax. Under the proposal, a base year value going back to 1975 was set, property taxes were limited to 1% of assessed value, and increases were limited to a maximum of 2% each year. Although no other state has addressed the issue as California has, Prop 13 has remained in effect ever since, despite attempts to overturn it.

“It seems unlikely that California will be considered a tax haven,” said Carol Kao, CPA, attorney and partner in the private client and tax team in the San Diego office of international law firm Withers. “Property values ​​were rising so rapidly in the 1970s that people were being forced out of their homes, so they adopted Proposition 13 to keep the increase at a low rate unless there was a change in owner. This allowed people to keep their homes.

Now Proposition 19, which was added to the California ballot in June, threatens to change critical aspects of Proposition 13.

“It would change the current parent-child exclusions,” said Yin Ho, senior partner in the commercial division of Withers’ San Francisco office.

Under the principal residence exclusion, parents can transfer a principal residence of unlimited value to their children without triggering a reassessment. In addition, there is a lifetime exclusion of $1 million ($2 million for a married couple) for non-principal residence, which allows the transfer between parents and children of up to $2 million of the assessed value of all other types of property, such as second homes, rental properties and commercial premises.

“Proposition 19 would eliminate the non-principal residence exclusion entirely,” Ho said. “To qualify for the principal residence exclusion, the child who received the property would be required to use it as their principal residence. of the child, and the amount of the exclusion would be limited to $1 million of assessed value.”

Will Proposition 19 pass when voters weigh in on November 3, 2019?

“It’s too early to tell,” Ho said. If voters don’t understand the measure or see key words like “change,” there’s usually a lot of opposition. The last time a similar measure was proposed, it lost by double digits.

“Taxpayers generally don’t approve of a proposal that would raise taxes,” Kao agreed. “But they cleverly packaged this one to make it appealing to some voters. And its name alludes to fighting forest fires, so it sounds more appealing. He may gain traction, especially for the over-55s, so he may get enough votes.

“Proposition 19 contains a measure that makes it favorable to people over the age of 55 who want to transfer the property value of their primary residence upon sale to a new replacement residence,” Ho said. to move to a new, more valuable home and take the current property tax base with them. They could do it three times in their lifetime, but can only do it once under current law. And it can be done in any county in California, whereas under current law the county must participate in the portability rules, and not all counties do.

Kao gave a personal example. “My parents bought a house in the early 1970s for $60,000. It is now worth $1 million, and my mother would like to downsize following my father’s death. Under current law, she couldn’t take the value with her into a downsized home.

Taxpayers should think about planning ahead, according to Kao and Ho.

“The timing is interesting because of the national elections,” Kao said. “Depending on the election results, the inheritance and gift tax exclusion could be significantly reduced from its current record high. Planning whether or not to acquire a new qualifying property is an additional issue. There are a lot of layers and technical details that need to be considered.