Propositions 13 & 19
Love them or hate them, you need to understand them.
Despite its obvious flaws, Proposition 13 was a decisive voter response to flagrant county assessor abuses of power and Assembly Bill 80, which caused California property tax assessments to skyrocket. The fact that seniors were being “taxed out of their homes” provided the rallying cry for the Howard Jarvis/Paul Gann tax revolt that has since grown into a “patchwork of propositions” collectively thought of by California property owners as “Prop 13.” Until now, each addition to the patchwork (Propositions 8, 58, 60, 90, and 193) was seen as a victory for property owners.
Collectively, they (1) limited real estate taxes to 1% of assessed value; (2) limited assessed value increases to 2% per year; (3) reduced property tax assessments in declining markets; (4) enabled property owners to transfer their principal residence and up to $1 million of properties with their assessed values to their children or grandchildren; and (5) enabled homeowners over the age of 55 to sell their residence and transfer their assessed value to a new home in 11 of California’s 58 counties.
In stark contrast, the passage of Proposition 19 is a mixed bag. There are definite winners and definite losers. According to Estate and Elder Law Attorney Terri Hilliard Olson, “The winners are anyone over the age of 55 moving between counties, homeowners with severe disabilities, and anyone that lost a home in a natural disaster. Unfortunately, the losers are your heirs.” Why winners and losers? What exactly did Prop 19 do to Prop 13? As simple as 1-2-3, Prop 19 gutted the intergenerational transfer protections previously granted by Propositions 58 and 193.
First, it took away the right to transfer more than one property without reassessment. Prior to Prop 19, you could leave your primary residence to one child and your vacation home or investment property to another. Now, you have to choose which of your children is going to inherit the only property that comes with the tax benefit.
Secondly, Prop 19 put a limit on the tax benefit you can transfer to the child inheriting your primary residence. What used to be an unlimited benefit is now capped by a complicated formula that boils down to a maximum benefit of $1,000,000 in assessed value.
And thirdly, the transfer of your primary residence escapes reassessment only if your child makes it their primary residence. If your child lives out of town or just does not want to move into your house after you die, they lose all of their reassessment protections. If you have more than one child, some strict interpretations of Prop 19 assert that you lose your reassessment protection unless all of your children move into the home. Additionally, some counties will now be monitoring who is living in homes passed from parent to child. Why? Because the protection from reassessment ends the minute your child ceases to use the inherited property as their primary residence. Sound daunting? Proposition 19 is so flawed in these regards that the State Board of Equalization called for clarifying legislation at its January meeting.
Inexplicably, none of these negatives were communicated during the campaign. Ballotpedia.org (a website for political junkies) documented only $69,008 spent opposing Prop 19, while the California Association of Realtors (CAR) and the National Association of Realtors contributed more than $45 million of the $57 million spent promoting it. Which raises the question: Why would CAR spend tens of millions to negate intergenerational transfer protections? When I called CAR, I simply could not get a straight answer. When I asked Estate Attorney Marc Schwartz, his response was, “When CAR’s website says Proposition 19 opens up tens of thousands of housing opportunities, it is really saying that Proposition 19 forces thousands of middle and upper middle class California families to sell real estate they would have passed on to their children. For many clients, this requires rethinking major portions of their estate plans.” All of which begs the question: Is there anything you can do to recover at least part of what Prop 19 has taken away? The jury is still out and estate attorneys are burning the midnight oil exploring alternatives, which will provide a perfect segue to future articles.
For tax questions, contact your accountant. For inheritance questions, contact your estate attorney. For questions about this article, property management, or estate management, contact the author at D.Huberman@LexingtonPMC.com. Doug Huberman is a former Professor of Economics, Air Force Top Gun, and co-owner of Lexington Property Management.