California Parent-Child Property Tax Exclusion Changes in 2021

California Parent-Child Property Tax Exclusion Changes in 2021

(Proposition 19 Passes)

Dear Clients, Colleagues and Friends,

Under California’s current property tax system, homeowners who are 55 and older only have a one-time opportunity to retain their existing property tax basis if they sell their existing home purchase another home of equal or lesser value – either within the same county, or to ten other eligible counties. However, California voters have tentatively approved Proposition 19, which would expand this current tax benefit by allowing homeowners age 55 and older, homeowners with severe disabilities, and homeowners whose residences have been substantially damaged by wildfires or natural disasters to preserve the original “property tax basis” from their current home when purchasing another home in the state of California, regardless of location or value of the replacement primary residence, so long as done within two years of the sale of the original primary residence. Thus, this would allow senior homeowners who have lived in their home for 20 years to avoid a costly property tax increase, regardless of whether if they decide to upgrade or downsize to a new residence. This particular aspect of Proposition 19 takes effect on April 1, 2021, and now permits owners who are over 55 years of age or severely disabled to transfer the property tax basis of a primary residence up to three times.

On the other hand, Proposition 19 will concurrently eliminate the existing property tax break for children who inherit but don’t live in their parents’ houses. Under existing California laws,  property taxes are limited to 1% of a home’s taxable value, based on the year of purchase, while restricting tax increases to a maximum of 2% annually – even if the home’s value increases much more.  While these property tax benefits do not apply to new construction developments or “changes in ownership”, the current law provides that property transfers between parents and children (which includes property inherited by children from their grandparents where both parents are deceased, as well as the subsequent inheritance of the same property by the next generation) are not considered a “change in ownership” and are excluded from property tax reassessment regardless of use (residential, vacation, rental, business).  Thus, homeowners (and their families) typically receive more tax benefits the longer they remain in their homes, because their tax bills stay restricted even as the fair market value rises over the course of several generational transfers.  However, Proposition 19 will eliminate these tax benefits by imposing a mandatory property tax reassessment for all property that is transferred between parents and children where the property is no longer used as a primary residence. Therefore, unless an exemption applies, any such ownership transfer between parents and children will trigger a reassessment of the transferred real property to its current fair market value as of the transfer date (which subsequently becomes the property’s new taxable value), which may result in a dramatic increase in the property’s taxable value.

As of November 11th, the Associated Press has projected a marginal win for Proposition 19 with approval from 51.2% of CA voters (48.8% voted no) at approximately 87% of votes counted.

If Proposition 19 passes, beginning February 16, 2021, the tax break for property transfers between parents and children will be restricted to children who use the property as a permanent place of residence. Furthermore, even if the inheriting party uses the home as a permanent place of residence, if the home’s fair market value exceeds the property’s assessed value by more than $1 million, this will still result in a partial property tax reassessment. Then, beginning February 16, 2023, the $1 million threshold will be adjusted on an annual basis according to the California House Price Index.

Therefore, if you are considering changes to your estate planning you may benefit by making changes on or before February 15, 2021.

Jeffrey M. Verdon, Esq.

For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the: Jeffrey M. Verdon Law Group, LLP at or 949-333-8143

Posted in Client Alert.