Prop 19 – Another look at prop 19’s effects for CA property owners

January 12, 2021
Categories
Estate Planning

The passage of Prop 19 has serious implications for property owners in California. In an attempt to stay ahead of these massive changes to the market, we have already been exploring the ways that Prop 19 has been affecting the estate plans of California homeowners.

The passage of Prop 19 has serious implications for property owners in California. In an attempt to stay ahead of these massive changes to the market, we have already been exploring the ways that Prop 19 has been affecting the estate plans of California homeowners.

Whether the passage of Prop 19 is positive or negative for you depends heavily on how you have structured your estate plan. Particularly if you are planning on passing down California property to your heirs, understanding the changes is paramount.

What are the effects on California inheritance laws? 

One of the biggest things that Prop 19 changes is to the inheritance laws. Prior to the passage of the Prop, if a couple had bought a house in an expensive California locale in the 1950s and end up passing down the property to their children in the 2010s, those children would continue to pay property taxes at the 1950s rate. This exclusion would apply even if the children decided not to make the home a primary residence but instead rent it out at market value. In essence, the state was losing a lot of revenue from this.

A further imposition that Prop 19 puts on inheritance and property is a residency requirement. There will still be some tax exclusion laws in place for inherited property even after the passage of the Prop, but in order for family to take advantage of these exclusions children must live in the property as a primary residence. You can imagine that this would be very difficult for adult children who may have families of their own by the time that the property is ready to be passed down.

What are the effects on homeowners? 

The passage of Prop 19, in addition to being generally positive for the tax revenues of California municipalities, is also expected to encourage seniors to sell their properties and downsize. Prior to the passage of the Prop, many seniors were holding on to outsized homes for fear of needing to pay much higher taxes if they sold their properties.

Prop 19 is also expected to change the general “face” of the average homeowner in certain areas of California. For instance, many blue collar families in expensive areas would pass down their homes through the family to take advantage of the tax exclusions. It is possible that with the changes Prop 19 brings that many of these families will sell these high-value homes since the tax adjustments Prop 19 brings will raise the cost of taxes.

Some experts are hypothesizing that these changes will also drive younger homebuyers out of the state in search of more affordable properties, since they will not be able to take advantage of the tax exemptions as robustly as in the past.

What should our next steps be? 

It is always best to confer with an expert after major changes to tax codes, like Prop 19. There is no one-size-fits-all measure for this. In some situations you may wish to adjust your estate plan to name a child who can move into your home as a primary residence, and in others you may wish to make plans to sell the property when you no longer reside there. Contact us at AmeriEstate to discuss your options.