On November 3, 2020, California voters approved Prop 19, which will make several changes to the state’s property tax laws. Among these changes are new restrictions on the applicability of the parent–child/grandparent–grandchild exclusion from property tax reassessment upon certain transfers. These changes to the exclusion will be effective for transfers occurring on or after February 16, 2021.
Until these changes take effect, current law provides that certain transfers of real property, such as a principal residence or vacation home, between parents and children (or from grandparents to grandchildren if the intervening parent is then deceased) may qualify for an exclusion from property tax reassessment. This exclusion is essentially unrestricted for the transfer of a principal residence. For the transfer of a nonprincipal residence, this exclusion is restricted to $1 million per individual (or $2 million per couple) of the full cash value of the property (“full cash value” is the assessed value of the property at the time of the transfer, not the fair market value).
Starting on February 16, 2021, Prop 19 will make the following changes to this exclusion:
- Transfers of a nonprincipal residence, such as a vacation home, rental or other business property, will no longer qualify for any exclusion. This means that transfers of a nonprincipal residence occurring on or after February 16, 2021, will trigger property tax reassessment to fair market value as of the date of the transfer.
- Transfers of a principal residence will qualify for the exclusion only if certain requirements are met. Even if the transfer qualifies for the exclusion, it may still trigger a partial reassessment of the property taxes for the residence.
For the Prop 19 principal residence exclusion to apply, the person receiving ownership of the residence must use it as his or her principal residence after the transfer. This will require the new owner to file a Claim for Homeowners’ Property Tax Exemption within one year of the transfer. Thus, property taxes would be reassessed to fair market value as of the date of the transfer if the new owner uses the residence as a rental property or makes any other nonresidential use of it.
If a transfer qualifies for this more restricted exclusion under Prop 19, it will increase the property taxes of the transferred principal residence to the extent the residence’s fair market value exceeds the sum of $1 million plus the residence’s adjusted taxable value (“adjusted taxable value” is the value upon which the residence’s property taxes are calculated, usually the original purchase price plus improvements and statutory annual increases). In essence, the Prop 19 exclusion will require a partial property tax reassessment if the residence has accumulated a sufficient amount of appreciation. Beginning on February 16, 2023, and every other February 16 thereafter, the $1 million amount used for triggering a partial property tax reassessment will be adjusted for inflation to reflect the percentage change in the California House Price Index for the prior calendar year, as determined by the Federal Housing Finance Agency.
Even though Prop 19 will broadly restrict the parent–child exclusion, it expands how this exclusion may be applied in the following situations:
- Transfers of certain family farms will qualify for the exclusion. Prop 19 defines a “family farm” as any real property which is under cultivation or which is being used for pasture or grazing, or that is used to produce any agricultural commodity. If claiming the exclusion as a family farm, the language of Prop 19 does not expressly require the new owner to use any residence on the family farm property as his or her principal residence after the transfer, nor will it require the filing of a Claim for Homeowners’ Property Tax Exemption. However, the property must continue to be used as farmland.
- Transfers of a principal residence or family farm from grandchildren to grandparents (or from grandparents to grandchildren) will qualify for the exclusion. Current law allows the exclusion to apply only to transfers from grandparents to grandchildren (not from grandchildren to grandparents). Such transfers will qualify for the exclusion only if all parents of the grandchildren, who qualify as children of the grandparents, are deceased on the transfer date.
A recent letter dated December 11, 2020, to all county assessors from California’s property tax authority, the State Board of Equalization (the BOE), appears to potentially create some confusion around the application of the Prop 19 exclusion to family farms by stating that a principal residence “also includes a family farm that contains a principal residence.” The language of Prop 19 separately defines these terms and does not expressly provide that a family farm also has a principal residence on it.
In its letter, the BOE suggests that there are still many uncertainties surrounding the implementation of Prop 19 due to its language not addressing all issues, and that these uncertainties will need to be resolved through future clarifying legislation. Until such clarifying legislation is enacted, the BOE has recommended that all county assessors track possible qualifying transfers since such clarifying legislation would likely be retroactive to February 16, 2021.
To avoid increased property taxes under Prop 19, California property owners who intend to gift or sell their principal or nonprincipal residence properties to their parents, children or grandchildren should consider doing so before February 16, 2021.