Proposition 19 means tax increases for owners of inherited property.

As I discussed in my article last week, Proposition 19 Explained!, there are huge tax benefits for many people in California wanting to sell and relocate within California. But, there is a downside to Prop 19.

Proposition 19 came into effect on February 16, 2021. In terms of inherited property, Prop 19 replaced Prop 13, which allowed property tax of inherited property to be grandfathered in with relatively no conditions.

Under the new Proposition 19, a child (or children) who inherits their parents (or grandparents) primary residence may keep the original property tax base of the parents or grandparents ONLY if the property is the principal residence of the parents or grandparents AND the child (or children) makes it their principal residence within one year. Children who inherit highly appreciated property from their parents or grandparents are going to be Impacted negatively UNLESS they use it as a primary residence. Even then they may see a tax increase if the property has increased in value over a million dollars. I’ll explain more below.

Prop 19 stipulates that properties transferred from parent (or grandparent) to children will trigger a property tax reassessment to fair market value. So, unless at least one of the children will use the property as a primary residence, the child will have to pay property taxes on the newly assessed value.

Unfortunately, a typical trust will NOT bypass Prop 19. Wills and trusts are essential to avoid probate in California, but they won’t prevent the full reassessment required by Prop 19.

Even if the child decides to use the inherited property as his or her primary residence, there is only an exclusion for a million dollars of appreciation. So, the new property taxes will be the new assessed value, minus 1 million dollars, minus the original value of the home.

For example:

Let’s say the parents’ property taxes were based on a $300,000 purchase price from 30 years ago. If the child inherits that home and it is re-assessed for $1,300,000, then (because of the $1,000,000 allowance) the child will not have to pay any additional property taxes. BUT any amount above that $1,300,000 will be added to the original $300,000 value, and that will be the new taxable value of the home. The property taxes will go up even if they make it their personal residence.

The good news is that Prop 19 is not retroactive. If you are residing in an inherited home, you can rest easy knowing that any homes transferred on February 15, 2021 or before will not be impacted by Prop 19.

If the child wants to sell the property, the benefit is to sell the re-assessed property right away and avoid the capital gains.