SPECIAL ALERTS

Proposition 19 Update

Changes to transfers are now in effect.

As a result of the passage of Proposition 19 in the November 2020 election, the property tax relief available to parents transferring their properties to their children has been dramatically limited.

Applicable to transfers that occurred on or after February 16, 2021, property transferring from parent to child avoids a step-up in value only for:

Transfers of principal residences and family farms (transfers of non-principal residences/family farms no longer qualify for relief from a change-of-ownership reassessment);
The first $1 million of additional assessed value of the principal residence (anything above this amount will be subject to reassessment); and
Property that is used as the child’s/grandchild’s principal residence/family farm. (If the child does not use the home as his or her principal residence, the entire value of the property will be subject to reassessment).

As before, the same exclusion applies to transfers between grandparents and grandchildren as long as both of the child’s parents are deceased as of the date of the transfer

No implementing legislation yet
This radical shift in how inter-generational transfers of property are assessed in California has raised a lot of unanswered questions. It was hoped that implementing legislation would be enacted before the February 16, 2021, operative date. Unfortunately, that did not happen.

Comment
Many voters did not understand the devastating impact Proposition 19 will have on many lower- and middle-income families trying to pass along the value of their one major asset to their children/grandchildren. As a result of the reassessments that will be required for many of these transfers, many taxpayers may be unable to afford to keep their family homes or family farms. This is leading legislators and voters alike to call for another initiative on the next ballot that would reverse the inter-generational transfer changes made by Proposition 19.

Note: This is the perennial problem with tax propositions. The writers of the propositions know what they want but don’t get formal guidance from a tax agency or they couch hidden tax increases they want to slip through in a proposition that is asserted to be for something else such as over age 55 relief. Unfortunately, neither a tax agency nor the Legislature can change a proposition without doing another expensive proposition.

BOE guidance
In an attempt to answer the numerous questions raised by Proposition 19, the BOE has issued FAQs. The FAQs answer a variety of issues. Below are some of the key highlights.

Some of the key takeaways from the FAQs include:

Timing

Proposition 19 only applies to transfers that occur on or after February 16, 2021. Transfers that occur prior to February 16, 2021, are governed by the former exclusion rules enacted by Propositions 58/193.
The transfer can be evidenced by a recorded deed or an unrecorded deed (such as a notarized statement of transfer), as long as the taxpayer can show evidence that the transfer occurred prior to the recordation date. This is important because a lot of people were unable to have their deeds recorded prior to the February 15 deadline because of COVID-19–related delays.
Taxpayers can submit an application/claim for the parent/child exclusion under the old rules after the February 16, 2021, date as long as the transfer occurred prior to February 16, 2021.

Eligibility

A “temporary absence” from the family home by either the parent or the child as a result of long-term hospitalization, military service, or temporary job transfer will not impact the availability of the exclusion.
A “family farm” is “any real property which is under cultivation or which is being used for pasture or grazing, or that is used to produce any agricultural commodity.” The family farm does not have to contain a principal residence to qualify for the exclusion.
There is no limit to the number of family homes or family farms that may be transferred. So if a parent has two properties, they may live in one for a few years and transfer it to one of their children, and then move into the other property and use it for a few years and transfer that property to another child. As long as both children use the transferred homes as their principal residence, both properties will qualify for the exclusion.
If a parent transfers the property to all of his/her children, only one of the children needs to occupy the home as their principal residence in order to qualify for the full exclusion. The exclusion will remain in effect as long as at least one of the children to whom the property was transferred occupies the home as their principal residence.

Ineligible transfers

The Proposition 19 exclusion does not apply to principal residences held in a limited liability company.
If the child moves out after using the home as his or her family residence and changes its use to a rental property or vacation home, the base-year value of the property will be set at the FMV of the property when it was inherited, subject to the 2% annual inflation adjustment, but there will be no retroactive assessment.
Children have up to three years from the date of the transfer to file a claim for the exclusion to receive relief back to the time of the initial transfer. If a claim is filed after three years, the exclusion will only apply prospectively.

Claiming the exclusion

The child has up to one year to commence using the property as their principal residence in order to qualify for the exclusion.
The principal residence may be evidenced by the taxpayer claiming a homeowner’s exemption for the home or the Disabled Veterans’ Exemption.

Other issues
The FAQs also address a variety of scenarios involving trusts, partial interest transfers, and life estates.

New forms
The BOE has developed and provided to the counties new forms for taxpayers to use for inter-generational transfers. These include:

BOE-19-G, Claim for Reassessment Exclusion for Transfer Between Grandparent and Grandchild Occurring on or After February 16, 2021; and
BOE-19-P, Claim for Reassessment Exclusion for Transfer Between Parent and Child Occurring on or After February 16, 2021.

About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.

Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:

Estate Planning & Administration
Asset Protection Planning
Tax Planning, Tax Debt Resolution and Tax Litigation
Business & Corporate Law and Planning
Real Property Law & Planning

As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.

Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.

Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).

*Equivalent

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