WHAT YOU NEED TO KNOW RIGHT NOW
CALIFORNIA PROPOSITION 19
ITS DEVISTATING EFFECT ON YOUR FAMILY
WHAT TO DO BEFORE IT’S TOO LATE
By JANIS A. CARNEY
Attorney at Law
Certified Specialist in Trusts & Estates* and Elder Law**
Although not yet final, it appears that on November 3, 2021, Californians voted by a narrow margin in favor of Proposition 19 (“Prop 19”) to extend greater property tax protections to our elderly, disabled and wildfire victims. All of that is great. HOWEVER, it came at a significant price for many California families – limiting the ability to pass coveted Prop 13 tax rates onto children and grandchildren after February 15, 2021.
We have only a narrow window of opportunity to lock in the low property tax rates, so we’ll need to act quickly if this is important for the legacy of your family home and other valuable family assets. My law firm is uniquely prepared for this challenge as specialists in both elder law and estate planning. Let me explain the problem and why you should seek help right away.
California property taxes are based on 2 things: (1) the “assessed value” of the property, and (2) the “tax rate”. In most states, the “assessed value” is adjusted every 1 to 3 years and the tax rate varies from 0.18% to 1.89% depending on the particular state.
But, in California, because of rapidly increasing home values that threatened to price people out of their homes, voters passed Prop 13 in 1978. Prop 13 fixed the property tax rate at 1% and, more significantly, limited the annual increase in the assessed value of property to just 2%, as long as ownership of the property did not change hands. In the following years, voters passed further propositions that excluded transfers to children and grandchildren from reassessment as well. Prop 19 changes these exclusions.
HOW PROP 19 MIGHT AFFECT YOU
Prop 19 imposes new qualifications on the parent-child exclusion by: (1) requiring the child to use the property as the child’s own principal residence, and (2) limiting the exclusion to just the first $1 million of fair market value. These changes will affect California families in many different ways. Here’s a snapshot:
- Daughter Taxed Out of Family Home. Mom and Dad bought their Saratoga family home in 1978 for $56K. Dad passed away a few years ago and Mom, who is over 90 years old, wants to live out her life in the home and then pass it to her only child, their daughter, who is herself over 60 years old. Mom and daughter agreed that daughter should move in with mom to provide companionship and help with mom’s care when it became needed. Daughter, then, would plan to stay living in the home where she grew up after mom dies. The current Prop 13 assessed value of the home is about $150K, while its current market value is about $2.5M due to its location. However, now because of Prop 19 passing, the annual property taxes on the home when mom passes away will jump from about $1,500 to over $13,500 a year. Daughter, herself now on a fixed income, will be taxed out of the family home and forced to sell it and move out of the area.
- Reduced Value Rental Properties. Mom bought a modest home in San Jose for $45K in 1980, that is currently worth $1M. Because of Prop 13, the property tax is only $1,200/year. Mom needs to move into a care facility and her son wants to rent out her home to help pay for his mom’s care. Because son does not plan on moving into his mom’s home, when he inherits it after mom passes, the property will be reassessed at its full market value, $1M, and the property taxes will jump to $10K per year. Son will face the choice of sharply increasing the rent to pass through the added taxes to the tenant, or if that is not possible, of selling the property.
- So Long to Retirement and Legacy Properties. Parents built their family home on a hillside in Los Altos 40 years ago, and because of Prop 13, they pay less than $2K in annual property taxes. Their home is now worth $3.4M. When the parents pass away, their son will inherit the home, and would love to live his retirement years in the home, or keep it for one of his own children when they are older. But, for now, his family needs to stay close to his childrens’ schools elsewhere. Yet, if he delays, the property tax will be adjusted to over $34K/year, and he will be forced to sell his parents’ home and relinquish his retirement dreams.
- Burdens on Building Owners and Tenants. This time the property is a small office building mom and dad built in the 70s for $100K and is currently valued at $3.5M. The family depends on the rental income from the property. The current property taxes on the building are $3K. However, when the last of mom and dad passes away, the property taxes will jump to over $35K a year. Will the family be able to pass the taxes through to the small businesses that occupy the building? Or will their tenants, who can’t absorb such an increase in their rent, be forced to either go out of business, sharpy increase the price of their goods/services to their customers, or move somewhere else. As a small business owner in such a situation myself, this is a very worrisome situation.
- Goodbye Vacation Home. Mom and dad, who are not all that old right now, own a modest vacation condo in the mountains they bought 20 years ago for $150K and is now worth $600K. If they hold onto it until the last of them dies in another 20 years, the Prop 13 protected property taxes will be about $3,300/year. But, what happens to the property taxes then? It gets reset based on the market value of the property at that time. Given that the property quadrupled in value over the last 20 years, let’s assume it quadruples again over the next 20 years to $2.4M. So, when it is reassessed at the last death, the property taxes skyrocket to $24K/year. Holy Cow! Will the children be able to afford to keep the family‘s vacation home?
WHAT CAN YOU DO?
What you can do is educate yourself to understand how these changes affect your specific circumstances. That’s where a trusted professional can help. As a trusts & estates attorney, and especially as an elder law attorney, I have used various techniques for countless clients over the years to protect family assets from the ravages of long-term care for mom and/or dad in a nursing home. These same planning techniques can be adapted RIGHT NOW, before Prop 19 takes effect, to protect the family property from re-assessment and the huge increase in property taxes on mom’s/dad’s death.
NOT TO RUSH YOU, BUT…
To take advantage of this opportunity, you must act now. This type of planning can be complicated, and each individual family situation is different. So, it takes time and we have less than three (3) short months to get it done.
Call today for a complementary appointment to see if we can help your family save the family home or other legacy properties. But, we can only handle the work required to complete this planning for a limited number of clients in the time available before February 16, 2021. After that, this opportunity will be gone forever.
The Law Offices of Janis A. Carney
Certified Elder Law Attorney by the National Elder Law Foundation*
Certified Specialist in Elder Law by the State Bar of California Board of Legal Specialization**
Certified Specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization**