Know How Prop 19 Might Affect Transfers of Property
Transcript:
Katie Nealis:
I want to transfer a property to my daughter, how does prop 19 affect property affect the property tax?
Easan Arulanantham:
So let’s start on property, it affects a lot of different props. So I’m going to focus on what happened to prop 58, which is the parents to child transfer. So prop 58, was enacted, I think, in the 80s, mid 80s. And essentially, I could transfer my primary residence with unlimited tax basis to my child without it being reassessed. And then also, I could transfer other properties, whether that be vacation home or rental unit, for up to a million dollars of tax basis to my child, and they wouldn’t be reassessed the issue with then all this got changed with prop 19. So essentially, prop 19, those other properties, now, they’re not excluded. So if I transfer a rental property to my child, it’s gonna get reassessed at fair market, or whatever the appraisal will be for its property tax. And now, if I want to transfer my primary residence, I, there’s a lot more restrictions. So if I transfer it to my child, they will also have to live in that house for a year. And I can only exempt $1 million of basis. So let’s say I, my basis in this home is $500,000. And the fair market value is 2 million. So that’s a $1.5 million difference. So I’m only allowed to exempt 1 million. So $500,000 will be added to that new basis. So the new base on the house for property tax will be 1 million. And the issue is when that child if you ever decide to move out and use that house for another purpose, say a rental unit, that that property gets reassessed. And there’s, there’s some sort of adjustment fee to so prop 19, made a lot more restrictive, to transfer homes to children. And so it was pushed by the realtor Association. So more people were selling houses and moving houses. So that’s an important part to know.
Tom Vaughan:
Yeah, I’ve had a lot of conversations with clients about the prop 19. And they’re really upset. I especially the way that the proposition was marketed, you know, because all the ads, were talking about relief to fire, you know, wildfire victims and different things that are part of that Prop, not really, you know, showing that, hey, their kids are gonna inherit this house. And instead of paying, you know, the three, four or $5,000 of you know, property tax, it’s going to jump up to 30,000. Because the house is worth so much or, you know, something along those lines and, and really, you know, they they’re afraid that kids won’t be able to afford it. They were hoping the kids could keep the house or one of them could keep the house, you know?
Easan Arulanantham:
Yeah, that’s it. That’s exactly what they wanted. They wanted to get the situation where they were, it’s a movement of the home now, is there? I mean, are there strategies that somebody can do around this, you know, to try to deal with this for for your daughter. Fortunately, there’s no good clean strategy. Um, it’s cold. Right now, people are hypothesizing what they can do. And one of the hypotheses is, I can somehow, if you were to buy a house and then want to transfer it, this is like a best case scenario, they would make an LLC. And then they would have that. And so if you have an LLC, and less than 50%, is transferred. Yeah. There’s no like reassessment. But like, if you already have an existing property that you own, you’re kind of out of luck, which is really rough. I think a lot of people as more information comes out about prop 19, they’ll start to realize and not be happy about it. I think that marketing that the was done is like, it’s really good if you’re someone that wants to move properties and keep their basis, because now instead of one time, you can do it three times. Yeah. But you generational wealth is much harder to transfer property. Yeah, yeah, that’s, yeah, that’s, it’s it’s typical of a lot of these things, there usually is some way around it. But sometimes the solution is worse than the, you know, than the problem. You know, and so I’d be really careful with what I have seen also in the same areas, I’m not seeing anything that I would do personally, in order to try to make this work better. There was lots of different talks about different things you could do, but, you know, having to set up an LLC and manage all that and what have you. You know, maybe we should be pushing for a new, you know, a new law to kind of take away the old one. Yeah, there’s been pushes that um, maybe delay the like, when you transfer to a child, they delayed sort of like to how it happened on in February, delayed a couple more years to allow people to plan for and strategize. Yeah, but um, that bill never actually got it out of committee. So hopefully there’s some sort of push. But we’ve all you know, in the future.
Tom Vaughan:
Yeah, unfortunately, there’s not an industry push, you know, they had two realtors on one side, right pushing, you know, they’ve got some organization versus, you know, people like my clients, which is this fragmented group of people that have highly appreciated homes that were hoping to, you know, get a step up, and then get that let that kid have that house that that low basis, you know, my grandparents built a house and will then in 1836, that my father inherited, and his prop 13, you know, the, the taxes were really, because of Prop 58 were really, really reasonable. And, you know, he was at a point in time where he didn’t have that much money. So it was really helpful. Versus you know, probably wouldn’t have been able to stay in that home. And that’s kind of our family home. If it wasn’t for, you know, that ability to transfer those property tax. So it is I see, I see the see the issues, and I think it’ll be interesting to see how this plays out.
Easan Arulanantham:
Yeah, there’s some speculation because a lot of farmers want to also transfer the family farm and so there’s going to, there may be some sort of agricultural push to move the crop it into something better for them.
Tom Vaughan:
Oh, that could be an or that could be a you know, you’re right. There’s probably huge money there. that’s at stake. And maybe that’s the organizations that are able to get this law reversed or at least modified. That would be that would be great. I’m not a fan of what they did here.