As I sometimes do, this week I’d like to address questions I’ve been hearing from clients in recent days. The questions revolve around Prop 19, the proposition passed in November that takes effect today, a deadline that seems to have snuck up on folks, me included.
The idea behind Prop 19, so far as I remember from the political ads, was to free up the ability for seniors and certain others, such as wildfire victims, to move more easily about the state while taking their lower property tax base with them. There was also talk of freeing up more of the housing stock that was stuck, for lack of a better term, while folks waited to pass their homes to heirs. The emphasis was on favoring owners of primary residences over owners of rental properties. Helping fire fighters and providing for additional fire prevention was in the mix too.
To pay for this it was necessary to slam the door shut on what many viewed as a loophole allowing unfair tax breaks for those inheriting long-held family homes. There were (and still are) many notable examples of this. A 2018 story from the LA Times (a link is below) circulated about the actor Jeff Bridges and his siblings easily earning enough in a few weeks of renting an inherited family home to pay for a years’ worth of property taxes. Those taxes, according to the newspaper, were a small fraction of what they would have been if not for Prop 13. That late-70’s legislation and an additional inheritance tax break passed later capped taxes on certain properties and let those low rates carry over to heirs. The proponents of Prop 19, however, wanted would-be-landlord heirs to pay property taxes on the current value, not the much lower value the parents were assessed on. In other words, reversing an unintended consequence of Prop 13. The result is either a huge tax revenue opportunity for counties, or an unfair wealth redistribution strategy, or both, depending on your perspective.
While the ramifications of Prop 19 are positive for some, ordinary mortals without the deep pockets of celebrities may feel like they’re getting the short end of the stick. As this goes into effect people are wondering if they should be concerned, if there’s anything to do, and so forth. On the one hand, folks 55 and over will have expanded ability to move about the county. That’s a good thing that we’ll leave alone in this post. But others, those who will have to “pay” for Prop 19, have lots of questions.
Now, I’ll freely admit to not being an expert on the original Prop 13 rules or Prop 19, for that matter. I know enough to be dangerous, as they say, so I’ll leave the minutia to qualified estate attorneys and suggest you do the same. These attorneys are extremely busy right now, however, so I wanted to compile some information for you about the new rules. I’ve specifically avoided providing links to writings from attorneys as there’s lots of those online and I didn’t want to imply a recommendation. Also, many of the details are still being worked out so there’s no guarantee that a particular legal strategy will actually work down the road. Ensure you get opinions from multiple experts before doing anything.
The main issue at this point, so far as I can gather, is that the California State Board of Equalization (BOE), the government agency that comes up with the details for implementing Prop 19, is still working on it. Basically, they have to sort through the “legislative ambiguities” to determine the proposition’s true intent while also coming up with concrete ways to apply it. This takes time and leads to lots of open questions as all this kicks in today for certain transactions and April 1st for others.
Here’s some information from the BOE’s website (emphasis mine) showing the original intent and what the new rules are trying to accomplish.
- Limit property tax increases on primary residences by removing unfair location restrictions on homeowners who are severely disabled, victims of wildfires or other natural disasters, or seniors over 55 years of age that need to move closer to family or medical care, downsize, find a home that better fits their needs, or replace a damaged home and limit damage from wildfires on homes through dedicated funding for fire protection and emergency response.
- Limit property tax increases on family homes used as a primary residence by protecting the right of parents and grandparents to pass on their family home to their children and grandchildren for continued use as a primary residence, while eliminating unfair tax loopholes used by East Coast investors, celebrities, wealthy non-California residents, and trust fund heirs to avoid paying a fair share of property taxes on vacation homes, income properties, and beachfront rentals they own in California.
Here are some links to some BOE content. There’s a densely worded factsheet and a list of helpful FAQs.
Here’s an excellent write-up from a colleague summarizing how we went from Prop 13 to Prop 19, and who might be the winners and losers.
And here’s the LA Times story from a few years ago. It’s an interesting read.
Have questions? Ask me. I can help.
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