California has recently been hit with a wave of destructive wildfires that left the state struggling to fund wildfire fighting methods and county support services. As a result, some of the state’s tax laws and exemptions have come under examination as potential sources of new revenue for counties and wildfire agencies alike.
One particular focus has been the laws around taxing inherited property and transferring tax assessments. As of November 3rd, 2020, California voters have approved a measure known as Proposition 19, a bill that significantly affects these two tax laws. The ballot proposition specifically affects how people can transfer their tax assessments from home to home and between family members.
Historically, California has allowed certain homeowners to transfer their tax assessments within their own county and to homes of equal or lesser value. Past laws allowed this to occur one time. They also let parents and grandparents transfer the assessment of their property to children or grandchildren, keeping inherited property taxed at a much lower rate than other homes in the area.
The new law affects all these aspects of property tax and more. For divorcing couples, this bill has both benefits and drawbacks. Understanding how Prop 19 works can help you make more informed decisions with your finances and properties during the process.
How Prop 19 Will Work
The new bill is intended to protect vulnerable populations while increasing California counties’ revenue base. There are four fundamental changes that Proposition 19 will make to California law that may affect you and your family. The ballot measure will:
Broaden the area and value eligibility for transferrable property.
Currently, homeowners can only transfer their tax assessment within their current county and to homes of equal or lesser value, heavily restricting where you and your family can move using this benefit. The new bill will allow eligible homeowners to transfer their assessment anywhere in California. It also allows you to transfer your current assessment to more valuable properties with a corresponding upward adjustment.
Add restrictions regarding which homes can be transferred.
In exchange for the ability to transfer assessments to more valuable homes, the ballot measure also adds some significant restrictions on what properties can have their assessments transferred. Vacation homes, second homes, and any home that is not a primary residence are not eligible for assessment transfers to your family under the new law.
Increase the number of tax assessment transfers allowed.
Previously, no homeowner could perform a tax assessment transfer more than once. As Prop 19 goes into effect, anyone over the age of 55 or who is affected by severe disabilities will be able to transfer their assessments up to three times. For anyone who has met the age requirements and would like to move their assessment to a new home, this allows for more flexibility.
Reduce the ability to transfer homes among family members.
Finally, the new bill can seriously affect inherited properties. Any home valued at more than $1 million or that the inheriting child does not use as a primary residence must be reassessed after the transfer.
Prop 19, Divorce, and Children
These are some significant changes, especially for high net worth individuals. The consequences of these changes to laws may be good or bad, depending on your situation. In general, it looks like the new laws will be a net benefit for older individuals and those without children.
The ability to transfer tax assessments to more valuable homes, as well as to homes anywhere in California, offers significantly more flexibility for many. On the other hand, people with children may generate a new, heavy financial burden for their family will face in the event of a property transfer. Here’s how Prop 19 could work for or against you in the case of a divorce.
For some divorcing couples, Prop 19 will actually give them more options. If you’re a gray divorcee, for example, and want to move after a divorce, Prop 19 allows you to transfer your tax assessment anywhere in California. If you bought your home for $200,000 and it has since appreciated to $900,000, you can take your tax assessment of $200,000 to cover homes valued up to $900,000 anywhere in the state.
You can also purchase more valuable homes with the same tax assessment. For example, if you buy a $1 million home, you would keep your original $200,000 tax base, plus an adjustment for the additional $100,000 over your initial value. You can even do this twice more, for three total.
The downside of Prop 19 is that inherited property must be reassessed in almost every case. If your children or grandchildren are not living in your primary residence with you, or if your home is valued at more than $1 million, then you cannot transfer your current tax assessment. The result may be a tax burden that your children cannot afford. It also requires that any vacation home, secondary residence, or rental property must be reassessed during any transfer. Essentially, under Prop 19, real estate becomes a much less effective method of giving your children and grandchildren a valuable inheritance.
When you’re going through a divorce, it’s essential to plan for your financial future. While Proposition 19 has changed what planning will look like, it hasn’t made that planning impossible. Whether or not you have children, working with a legal and financial advisor is an excellent idea to navigate the changes Prop 19 has created.
Proposition 19 doesn’t officially go into effect until February 15, 2021. If you believe that your family still be negatively affected by the changes of Prop 19, you have time to take action before anything goes into effect.
If your financial plan for divorce has been affected by Prop 19, our experienced financial law attorneys can help you discuss your options and the best solutions for you. Dividing your assets during a divorce is already complicated enough. Let us help make it simpler for you and your family.