This article discusses California Prop 19, its background, how it can affect your estate planning, and how you can protect yourself from its hefty tax consequences.
California Proposition 19 poses a massive issue for California real estate owners planning to create generational wealth for their heirs and family. If they don’t take prompt measures, their heirs may face the possibility of a property tax reassessment and a hefty tax bill that may eventually compel them to sell the property.
We will discuss the how and why of the matter in this article. However, in essence, the property tax laws in the US have been getting stringent for the wealthy. No matter how much of a dutiful taxpayer you are, the government keeps finding ways to add more burden to your shoulders just because you dared to work hard and build a legacy for yourself and your family.
The way things are going, a single bill or law can take away the fruit of your life’s hard work from your family’s grasp and leave them with nothing. Do you want to stick around till that happens?
If your answer is no, Nomad Capitalist can help you. We’re honored to serve people like you who have what it takes to go where they’re treated best. After all, when countries worldwide are competing for your investment and offering you tons of tax exemptions and a high quality of life in exchange, there’s no point living in a place that seems on a mission to bleed you dry.
If a high-standard life and an abundance of investment opportunities in a tax-free or tax-friendly jurisdiction is your goal, set up a call with us today. If you play your cards right, you will never have to worry about someone snatching your generational wealth again.
California – State Overview
California is a US state along the Pacific Coast, bordering Oregon to the north, Nevada and Arizona to the east, and the Mexican state of Baja California to the south. It also has a coastline along the Pacific Ocean to the west.
With a population of 39,538,223, California is the most populous US state and the third-largest by area. The state’s capital is Sacramento, while Los Angeles is the most populous city.
What is Property Tax Reassessment?
In this article, we’ll be heavily talking about property tax reassessment and how, under CA Prop 19, it can adversely affect heirs who inherit the real estate from their parents or grandparents.
Before we jump into CA Prop 19 and what it means for CA real property owners and beneficiaries, let’s briefly discuss the concept of property tax reassessment.
- Property Tax Reassessment is re-evaluating a property to determine its value for property tax purposes. An assessor or a hired contractor performs the reassessment, during which they analyze the market value of a property to determine its tax value. They also examine the current state of the real estate market and a few other factors.
- How often a property is reassessed depends on the state in which it’s located. If the reassessment finds that your property has increased in value, you’re in for an increased tax bill.
- For example, let’s suppose, ten years ago, your property was reassessed for $100,000. If it is still valued at $100,000 for property tax purposes today, your tax bill would be the same as ten years ago.However, in reality, the property’s value would likely have increased or decreased over time, changing the tax rate you’d pay. If the value is now determined to be $200,000 following reassessment, you will pay more in property taxes.
California Prop 19 Explained
CA Prop 19’s full name is Proposition 19 – The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act.
CA Prop 19 effectively eliminated the prior Prop 58.
What is California Proposition 19?
California Proposition 19 significantly limits the ability to transfer your home or other real estate properties to your heirs (children or family) without property tax reassessment. A property tax reassessment may add huge sums to the heirs’ tax liability. The Act applies to all real property transfers on or after February 16th, 2021.
Background of CA Prop 19
Since 1978, Proposition 13 has provided a factored base year value for California real property owners, i.e., a restricted rate of increase on assessments of up to 2% annually. It also provides a cap on property taxes to 1% of the assessed value (in addition to local and county taxes). Since, over the years, the fair market value of California real property has exceeded far more in comparison, Californian real estate owners enjoy a lower property tax liability owing to Prop 13 and Prop 58 exemptions (we’ll discuss these shortly).
Prop 19 doesn’t nullify Prop 13 but requires the reassessment of the property at current fair market value at the time of transfer, at the time of death, sale, or as a gift, potentially adding a huge amount in payable taxes.
Effective Date of CA Prop 19
California Proposition 19, which the California voters passed on November 3rd, 2020, became effective on December 16, 2020. However, the parent-child and grandparent-grandchild exclusion changes became effective on February 16th, 2021, and the base year value transfer provisions became operative on April 1st, 2021.
Effects of CA Prop 19
California is where people came to realize their American Dream. The state’s population is highly diverse, with over ten million immigrants. Nearly one-third of the population is foreign-born – people who came to California to work hard and accumulate wealth for themselves and their future generations.
Most of these people invested in real estate and depended on that asset class to create generational wealth.
Now, inheritors may face the possibility of property tax reassessment, which can amount to a large tax burden. In essence, they will have to pay property taxes based on the current fair market value.
It is a big issue for inheritors and people who’ve worked all their lives to save up enough to pass on to their families.
CA Prop 19 (Current Law) vs. CA Prop 58/193 (Former Law)
CA Prop 19 completely nullifies CA Prop 58.
Under California Proposition 58, the state provided the following relief from reassessment under parent-child exclusion when transferring real property (between parents and children).
- Transfer of Principal Residence: Under Prop 58, a transfer of a parent’s principal residence to a child was wholly exempted from reassessment. The child also inherited the parent’s assessed value regardless of its assessed or current fair market value at the transfer time.
- Usage of Property: The Act also enabled the inheritor to use the property as they please – as a primary residence, a vacation home, or a rental. The property usage was entirely up to the new owner’s will.
- Transfer of Other Real Property: Transfers of other real property interests (residential or commercial) of up to $1 million of total taxable value (per transferor/spouse) were exempted from reassessment, regardless of the property’s current fair market value at the time of transfer.
Proposition 19 completely eliminates any exemption on the parent-child transfer of real property other than the primary residence. Children will not be able to inherit real property other than primary residence from their parents without reassessment at current fair market value at the time of transfer. This means that if you have a vacation home or rental property that you want to transfer to your children, they can now be liable for a considerable tax burden once they gain ownership.
As for the primary residence (family home or family farm) transfer between a parent and a child, the exemption remains – but with the following restrictions:
- The child qualifies for the exemption only if they continue using the transferred property as their primary residence. Moreover, they must move into the property within one year of the transfer.
- Once the condition mentioned above is established, the child’s taxable value is determined based on whether the property’s assessed value (current fair market value) at the time of transfer exceeds the parent’s taxable value by over $1 million.If the property’s assessed value at the time of the transfer doesn’t exceed the parent’s taxable value by $1 million, then the child assumes the parent’s current taxable value.However, if the contrary happens, then the child’s taxable value is the current assessed value of the property minus $1 million.
How to Protect Your Estate From California Prop 19
Proposition 19 squashes one of the most significant exemptions that homeowners rely on when transferring their property to their kids – fewer property taxes.
With that gone, the entire idea of creating intergenerational wealth dies since you get to enjoy no benefits or relaxation in exchange for all the time, effort, and money your parents invested in providing you some a degree of financial freedom. All you get is a huge tax bill.
Considering all that, it’s only fair to look for options to legally protect yourself and your estate from the effects of CA Prop 19. Below, we’ll talk about how you can do that.
Using LLCs – A Way to Transfer Real Estate Without Property Tax Reassessment
If you’ve read our several articles on LLC formation and benefits, you’ll know how impressive an LLC structure is and how it can help you protect your privacy and assets in numerous ways – even in the US.
When the real estate is owned by a legal business entity (LLC, etc.), the same rules for property transfers and taxable value do not apply. Here’s how you can use this to your benefit.
Purchasing The Property Through an LLC
You can adopt this route if an LLC is the property’s original owner, i.e., the property was purchased by an LLC rather than in your name. If an LLC-owned property is transferred to an LLC, as long as no new person gains more than 50% ownership or control of the LLC, then the property won’t go through reassessment.
If you have an (originally) LLC-owned property, you need to plan your property transfers in a way that no beneficiary gains more than 50% interest/control in your LLC.
Transferring the Property to an LLC
The above scenarios discussed properties purchased by an LLC and then later transferred to an LLC. However, what if you own the property in your own name and then later transfer it to an LLC (like most people not hyper-aware of estate planning do)? Will you be eligible for the same perks?
Not entirely, but somewhat yes. If you transfer your originally-owned property to an LLC and then transfer more than 50% of the LLC cumulatively to anyone else, the entire property will be reassessed for tax purposes.
Confused? Here’s an example. If you transfer 50% of the LLC to your children, the property won’t go through reassessment. However, later, if you transfer 2% of the LLC to another relative, the entire property will be reassessed because, cumulatively, you transferred 52%.
Although forming LLCs can help you protect your privacy and assets in numerous ways, you should never form or use an LLC without legal help or in-depth knowledge about what you’re doing.
Tax or estate planning is multi-layered and should always be done with the help of an experienced team of professionals – like ours.
At Nomad Capitalist, we’ve helped many seven and eight-figure entrepreneurs go where they’re treated best through our holistic strategies that address each domain of their personal and financial life.
If your goal is to create generational wealth and acquire the ultimate personal and financial freedom, contact us today.
Choose Your Own Tax Rate
Sounds too good to be true? As a US citizen, you’ve probably never had much control over how much tax you want to pay. Moreover, the government seems to be on a spree to impose as many taxes on the wealthy as possible. Not to mention the rising debt, the crashing banks, and the skyrocketing inflation. Everything in the US seems to be going downhill. Will you stick around and watch the crash first-hand to believe it? By then, it’ll be too late.
Alternatively, you can tread outward and go where you’re treated best. Many countries worldwide offer a high standard of living, affordable healthcare and education, lucrative real estate investments, and more – all in exchange for a fraction of your capital.
Why live an average life in a high-tax country when you can live like a king in a tax-free one? Want to know how that’s possible? Set up a call with us today.
California Prop 19: Consequences for Real Estate Owners and How to Protect Your Estate in 2024 FAQ
CA Prop 19, passed by the California voters on November 3rd, 2020, became effective on December 16, 2020. However, the parent-child and grandparent-grandchild exclusion changes became effective on February 16th, 2021, and the base year value transfer provisions became effective on April 1st, 2021.
California Proposition 19, The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act, significantly limits the ability to transfer your home or other real estate properties to your heirs (children or family) without property tax reassessment. A property tax reassessment may add considerable sums to the inheritor’s tax liability.
Yes, California levies capital gains tax at progressive rates ranging from 1% to 12.3% (same as the state’s income tax brackets).
Yes, CA Prop 19 concerns various individuals, including the disabled, natural disaster survivors, etc. It talks about the location of the replacement property or replacement primary residence for the disabled, defines equal or lesser value, etc.