Qualified Personal Residence Trust (QPRT) included in Changes to California Parent-Child Property Tax Exclusions
Dear Clients, Colleagues and Friends,
Prop 19
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 to purchase another home of equal or lesser value — either within the same county, or to ten other eligible counties. However, California voters have 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.
Proposition 19 takes effect beginning February 16, 2021. Then 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. And beginning February 16, 2023, the $1 million threshold will be adjusted on an annual basis according to the California House Price Index.
QPRT
It is important to note that the new law also applies to residences inherited by children via a qualified personal residence trust (QPRT). A QPRT is an estate planning mechanism typically used to remove a residence from the parent’s taxable estate while allowing the parent to continue living in the home for a fixed term – at the end of which the residence is typically transferred to the children. However, under Proposition 19, if the children do not use the property as their primary residence when the term of the QPRT ends, this will trigger a property tax reassessment. Thus, for those parents who have QPRTs whose fixed term ends on or after February 16, 2021, the value of their home may be reassessed to its current value.
Therefore, if you have a QPRT that terminates after February 15, 2021 or are considering transferring your residence to your children, you should consider modifying the QPRT or implementing other appropriate estate planning changes prior to February 16, 2021.
Contact us if you wish to discuss this subject or any of the other advanced planning strategies for which our law firm is well known.
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 jeff@jmvlaw.com or 949-333-8143.