California Passes Proposition 19
Proposition 19 was recently passed in California and will affect properties that you want to pass down to your children. It is important to know that Prop 19 will only affect the property taxes and reassessments of the property; it will not take away the step up in basis for inherited properties or impact capital gains taxes.
- Prop 19 stipulates that properties transferred from parent to children will trigger a property tax reassessment unless at least one of the children will use the property as a primary residence and the property has not gained more than one million dollars in reassessed value from its original assessment.
- Before Prop 19, a parent could pass down their primary residence and up to one million of assessed property (such as rentals or commercial) to their children without the property needing to be reassessed. This will no longer be the case once Prop 19 is taken into effect.
- Prop 19 will be in effect beginning on February 16, 2021 and will affect properties that are passed down after that date.
- There is a way around Prop 19 by using an irrevocable trust for the benefit of your children as a vehicle to transfer property before February 16, 2021 to preserve the low property tax basis.
- A trust could be a viable option for you if (1) you have enough estate lifetime exemption available to be used for transferring assets and not trigger a gift tax, (2) you intend to gift your property to your children after you pass away, (3) you have a property that has a currently low property tax assessed value and a high fair market value, and (4) your children plan on keeping the property as a rental, commercial building, or second home.
- There are a couple of serious considerations that you will need to be aware of before transferring your property to an irrevocable trust. By passing your property down to your children through an irrevocable trust, you will be required to give up all rights and use of your property now, which will cause you to depend on your children to allow you to continue living there for the remainder of your life and pay them rent. For commercial properties, you will be required to give up the rights to the principal and rental income; those will now go to your children. Another thing to keep in mind is that properties with a mortgage might not qualify to be transferred through an irrevocable trust because the lender might prohibit transferring the property to your children.
- Depending on how the trust is set up and the provisions of the trust agreement, there may be some income tax ramification that revolves around paying your children rent through the trust.
- By relinquishing ownership of your property, it will no longer remain a part of your estate, which may benefit you for estate tax purposes depending on the size of your estate. However, any properties and assets that are no longer in your estate will not get a step up in basis upon death. It means that if the trust and your children decide to sell that property in the future, they will not get any benefit of adjusting their basis and will continue to hold the property at the original cost basis. This could result in significant capital gains upon a sale.
If you have any questions about Prop 19’s affect on your situation, contact us. We will be able to help you plan the most tax-advantaged route to transfer your property to your children.