Proposition 19 was approved in November of 2020. Its goal is to give seniors, people with disabilities and victims of disaster the ability to take their current property tax assessments with them when they move within California. Previously, only 11 of the state’s 58 counties had opted in to the property tax portability laws that allowed an owner to sell their property in one county and move to another and take their tax assessment with them as long as the replacement property didn’t exceed the value of the relinquished property. This was helpful for seniors looking to downsize or move closer to family without seeing a huge increase to their property tax bill. It also allowed a property to come to market that might not have otherwise. The intent of Proposition 19 was to expand this to all 58 counties in the state. It also expanded the opportunities from just seniors to those with disabilities and those impacted by fires and other disasters. These were all positive outcomes for portions of our society that could be most at risk from new property tax assessments when they move.
In order to pay for this measure there were changes to the inheritance laws for real estate. One big change was the closure of the “Lebowski Loophole”. This is in reference to the inheritance rules in California that law allowed parents or grandparents to pass on a property to their children or grandchildren after their death and the property would not be reassessed for tax purposes. A 2018 Los Angeles Times article reported on how Jeff Bridges, the actor famous for “The Big Lebowski” and his siblings were benefiting from this by paying only $5,700 per year in property taxes on an ocean side home in Malibu that his parents bought in the 1950s while renting it out for $15,000 per month. Mr. Bridges did nothing different from thousands of other Californians who utilized the same law in the same way to benefit their children or grandchildren but because of the circumstances his situation became fodder for the Legislature to look to overturn these rules.
After the failure of Prop 5, a similar effort to allow for property tax portability in 2019, the authors realized that the state was going to go after these loopholes and if they could work with state legislators and other groups they could try and salvage as much of the inheritance protections they could while giving seniors and others the much needed tax portability that would benefit them and increase the supply of housing for all Californians. Thus, the compromise of Prop 19 was born. The inheritance rules were changed so that a primary residence could be passed down but it would have to remain the primary residence of a child or grandchild and there would be no reassessment on the first $1 million of current assessed value. So if a parent bought the house for $500,000 and it was now worth $1.5 million the house would not be reassessed. The exemptions for rental or investment properties were removed altogether so those would now be reassessed upon the transfer. Additionally, the proceeds from Proposition 19 are set to go into a fund that is to support fighting fires around the state.
Now the question becomes, “What can I do to protect my real estate investments for my children or grandchildren?” There are avenues out there that should be investigated. They include making gifts now to your children or setting up the properties into entities that would allow for them to transfer upon the death of a parent to a child without more than a 50% change in ownership. These options and others should be considered in consultation with your attorney, CPA and real estate professional. Everyone’s situation will be different and there’s no one cookie cutter solution. There will be tax implications not just for property taxes but for income taxes and capital gains. However, by working with your trusted advisors you can protect your family and investments for generations to come.
Brian Johnson is the new president of the Santa Barbara Association of Realtors. He is a California licensed real estate agent and the managing director of Radius Commercial Real Estate. Brian handles all types of commercial real estate transactions, but has a special focus on multifamily investments. He can be reached at 805.879.9631 or firstname.lastname@example.org.
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