The generations of California homeowners were working under a simple and soothing belief: The family house can transfer to the next generation without creating a huge property tax increase. They thought that due to the low tax base, which was provided through Proposition 13, it was a gift that kept on giving even after death.
With a close 50/50 vote, California voters voted in favor of the proposition 19, which essentially redefined California inheritance laws. A transfer hitherto tax-free is now likely to lead to property tax bills that grow 500 per cent or higher, obligating heirs to sell the same houses that their parents paid off all their lives.
California real estate owners cannot afford to keep ignoring Prop 19- it is a financial time bomb. Look for a professional who can help you in managing sales tax audit penalties.
Difference Between Old and New Rules
In order to comprehend the shock, it would be reasonable to examine the way things were prior to Prop 19.
In the old system (Propositions 58 and 193), parents were able to transfer their principal residence to their offspring without a reassessment of property taxes, whether or not the value of the home was high, and whether or not the child resided in the home. The parents were also allowed to transfer up to 1 million of the assessed value of other properties (rentals, vacation homes, commercial buildings) without causing a tax hike.
Prop 19 gutted those safeguards. Today, parent-child transfer exclusion is only applicable to a principal residence, and only in cases where very rigid criteria are met.
Check the Three-Headed Monster for Low Taxes
Suppose you inherit the Californian house of your parents. The following are the hoops you have to jump over to escape reassessment:
You Must Live in It: The child has to make the hereditary property their core house. When they lease it or occupy it as a vacation home, the exclusion is forfeited and reassessed at the current market value.
The One-Year Deadline: Heirs have only one year to maintain the date of transfer (typically the date of death) to occupy the property and claim the Homeowners’ Exemption with the county assessor. This window is missed, and the tax increase becomes permanent.
The $1 Million Cap: The exclusion has a limit even in the case of move in. Only the determined value of the parent can be shielded, and an added sum (as it is currently 1,044,586 on inter-state transfers between February 16, 2025, and February 15, 2027) can be shielded. Any market value over such a threshold is included in the taxable base.
Understand the Myth Around Old Estate Planning
This is the biggest error that most families commit: they believe a living trust can secure them. It does not.
Prop 19 is applicable irrespective of whether the property is a trust or not. Unless your estate plan was written after 2021, then it was nearly certain to be drafted on the assumption that the generous exclusions of Prop 58 would be permanent. That plan is now obsolete.
Creating a Trust Strategy
Not all revocable trusts will keep you out of trouble, but there are legal ways of reducing or actually evading the Prop 19 trap. They need advanced planning together with an experienced lawyer.
- The Family Property LLC
Aggressive strategies by family property LLCs have been developed by some law firms in order to possibly escape reassessment of non-primary residences. Families can maintain Prop 13 rentals and vacation homes by designing ownership rigorously.
- The Multiple Children Move-In Strategy
When a home is being inherited by more than one sibling, one must always occupy the house in order to maintain the non-occupancy of all the occupants. But when such a sibling subsequently moves out and another moves in within a year, then the exclusion is still maintained–unless the new resident also claims the exemption.
See also: business operations intelligence overview
Steps You Must Take
You simply have no time to lose, whether you are entering your own estate or you have just inherited property.
- It is assumed that your trust or will, which was drafted prior to 2021, is outdated. Talk to an estate planning lawyer who is familiar with Prop 19. Better to get an experienced person (like a tax settlement attorney) who can help.
- Adding a child to the title in your lifetime is a “band-aid on the wound,” which backfires. It will cause immediate re-evaluation, put your home at the mercy of the creditors of your child, and may make it difficult to step-up the basis.
- In case you have inherited property, then submit the Claim of Exclusion of Reappraisal (Form BOE-19-P) to your county assessor as soon as possible. The filing deadline of the Homeowners’ Exemption is one year after the death date.
Have records of the value of the property, date of transfer, and filings. Assessors in the county are very strict, and mistakes are not easy to make.
Proposition 19 is the greatest change in California property tax law since 1978. It has become the nightmare of thousands of families in terms of finances to pass down a family home. Past regulations are long since forgotten, and there is no other quicker method of losing your legacy than by pretense to their continuance.
However, there is one thing, the thing is, you can save the legacy of your family, even without violating the plan. You simply cannot afford to wait.
