Proposition 19: A Three-Year Retrospective
Well, How Did I Get Here?[1]
In 1986, California voters approved Prop 58 to provide a relatively generous exclusion from property tax reassessment for transfers between parents and children. Prop 60 passed the same year, granting homeowners over the age of 55 a once in a lifetime ability to transfer taxable value to a new residence within the same county. Additional allowances were added by subsequent propositions for grandparent-to-grandchild transfers, and for inter-county relocations.
On February 15, 2021, the longstanding reassessment exclusions were limited after Proposition 19 was approved by voters by a narrow margin of 51.11%. Public action committees spent $57 million in support of Prop 19, primarily the California and National Associations of Realtors. Their advertisements showcased firefighters and emphasized benefits for wildfire victims. Following eerie orange skies in August and September 2020, voters apparently were feeling generous to fund wildfire relief. Even as a real estate attorney, I was unaware of Prop 19’s provisions until days before the election.
Prop 19’s text required interpretation through enabling legislation and regulatory action. The BOE issued 11 letters to assessors, one chief counsel memo, two rulemakings, and an undetermined number of advisory opinion letters (including one to me) interpreting the law with examples and answers to common questions. Here we will review a few common real property transfers and Prop 19’s effects.
Living in a Shotgun Shack
Under the prior Prop 58 regime, an unlimited amount of taxable value could be transferred to a child without reassessment for a parent’s primary residence. Prop 19 now limits the transferable value to the current value plus $1,000,000 (as biennially adjusted) in amount excluded from reassessment for the family home, but also requires the child to make the property their own primary residence to retain the existing base value. In other words, Prop 19 is a boon to recipients of their parents’ proverbial “million dollar shacks” in the San Francisco Bay Area who keep the property as their family home.
In a Beautiful House
Also under the Prop 58 regime, homeowners over the age of 55 were only able to effectuate a single base year value transfer (or twice with a subsequent disability) to a new principal residence of equal or lesser value within 10 specific counties. Prop 19 now provides for base year value transfer to a new residence of any value (allowing additional value to be included) to any county up to three times. Seniors in high cost of living areas can “downsize” a few times to larger, newer homes in less costly areas.
After the Money’s Gone
Recent property sale listings describe properties essentially as “on the market for the first time in decades.” Inheriting children may have been letting the days go by and missed the one-year deadline to establish residence in their parents’ home. If the assessed value is relatively low because of Prop 13, significantly increased property tax bills could incentivize children to sell marginally profitable rental properties when increasing revenue is restricted by local or state law.
Same as it Ever Was
The official voter information guide arguments in favor of Prop 19 claimed that “unfair tax loopholes used by East Coast investors, celebrities, and wealthy trust fund heirs on vacation homes and rentals” would be closed. Between November 3, 2020, and February 15, 2021, many people with awareness of the coming Prop 19 rushed to transfer ownership to take advantage of Prop 58’s relatively generous exclusions. I speculate that the vast majority of families with smaller holdings of rental properties are unaware that their property will be reassessed upon a parent’s death. But if you ask your esteemed colleagues practicing in Prop 19 planning, they can report to you that so-called “loopholes” and strategies for avoiding reassessment still exist.
Am I Right, am I Wrong?
I am not ready to join the Howard Jarvis Taxpayers Association which has given Prop 19 the “death tax” moniker. My humble opinion regarding Prop 19 is that in 2020, a slight majority of California’s relatively uninformed voters decided to make an already-complicated set of property assessment laws even more cumbersome and fraught with pitfalls for those seeking to retain the benefits of Prop 13 indefinitely. The general public remains largely unaware of the effects of Prop 19, but it is my impression is that those who have become informed or been affected by Prop 19 express a negative sentiment.
The obvious beneficiaries of Prop 19 are (1) real estate sales professionals; (2) persons over age 55 and with disabilities; (3) children who receive a parent’s residence worthy of continuing as a primary residence; and (4) attorneys providing advice and planning to those seeking to avoid reassessment.
It’s a mixed result for victims of wildfires because their ability to transfer their base-year value can now be exercised statewide in any county and not measured from the date of disaster, but it is now limited only to principal residences as opposed to prior laws allowing for any property in some instances.
As discussed above, Prop 19 has the effect of severely limiting the availability of exclusions from reassessment for children receiving property from their parents. Other non-obvious “losers” include the county assessor offices. Specifically, the technological and administrative changes required to implement Prop 19 has been challenging and burdensome. Your author has heard from more than a few clients who timely filed valid Prop 19 claims, but had to wait a significant amount of time for those claims to be processed while paying increased tax bills (expecting to receive a partial refund in the distant future).
My God, What Have I Done?
According to the Department of Finance, additional revenues from Prop 19 to fund the new California Fire Response Fund or County Revenue Protection Fund were apparently non-existent due to offsetting deductions for property tax. Following Prop 19’s enactment, there have now been two failed attempts to get repeal initiatives on the ballot. It remains to be seen whether opponents of Prop 19 will ever muster enough support for a repeal.
[1] Your author has recently indulged in multiple viewings of the Talking Heads remastered release of the “Stop Making Sense” concert film. The lyrics of Once In A Lifetime inspired the themes of this article.