California’s Proposition 19 was passed by California voters by a narrow margin. Most voters probably didn’t study it very carefully.
Here is link to a table issued by the California State Board of Equalization summarizing the changes. https://www.boe.ca.gov/prop19/
The benefits of the new law were highly publicized: protecting the carryover “Proposition 13” assessed value for disaster victims who replace lost homes and enabling California seniors (age 55 or greater) to transfer their carryover “Proposition 13” assessed value to another home when they sell and purchase a replacement residence (effective April 1, 2021) up to three times anywhere in California. Those are no-brainer good deals.
The detriments of the new law were framed as closing “unfair tax loopholes” for the “rich”, principally relating to property received as a gift or inheritance to or from a parent or certain grandparents.
Before the enactment of Proposition 19, there was no reassessment to fair market value for a transfer of a principal residence between parents and their children, or between grandchildren and grandparents when both parents of the grandchildren are deceased.
Effective for transfers after February 15, 2021, the exemption from reassessment only applies to the excess of the fair market value of a primary residence (qualifying for the homeowner’s real estate tax exemption) over the transferor’s assessed value up to $1 million. Any excess for a qualifying transfer will be reassessed as of the date of the transfer (the date of death for inherited property.) The exemption only applies if the person who receives the property uses it as their primary residence (qualifying for the homeowner’s real estate tax exemption for the transferee within one year after the transfer.)
Before the enactment of Proposition 19, parents or qualifying grandparents could transfer up to $1,000,000 of assessed value for other real estate (not a primary residence) to their children or grandchildren without a reassessment.
Effective for transfers after February 15, 2021, property that doesn’t meet the primary residence requirements will no longer qualify for an exemption and will be reassessed to the fair market value on the date of transfer. This means vacation homes and rental property transferred to children or qualifying grandchildren will be reassessed as of the date of the transfer (date of death for inherited property.)
Note there is no grandfather rule for a bypass trust with a surviving spouse life beneficiary. The surviving spouse is considered to be the owner of the property for real estate reassessment purposes during his or her lifetime.
There is now a very short window up to February 15, 2021 to make tax planning transfers to protect a family’s real estate assessed value. (Note that county assessor’s offices will be closed on February 11 and 15, 2021 for Veteran’s Day and President’s Day.)
There is a conflict between the property tax reassessment consequences and the income tax consequences of a transaction. Under the current income tax laws, inherited property receives a “stepped up” or “fresh start” income tax basis (cost for computing gain or loss) equal to the fair market value on the date of death or alternative valuation date (rarely used.) The tax basis of the transferor generally applies for computing gains for real estate received as a gift.
I have intentionally only touched on the highlights of the planning considerations of these important law changes. This is actually a very difficult situation to manage.
If your family has significant holdings of California real estate (including almost everybody who is a homeowner in the San Francisco Bay Area), consider consulting with an estate planning attorney and a tax consultant who is aware of real estate change of ownership issues and income and estate planning implications right away.