California Proposition 19: Property Tax Changes and

Inheritance
naimishlewislaw.com/estate-planning/proposition-19-property-tax-changes-and-inheritance

March 4, 2021

By Adam T. Belsey, Esq.

Posted March 4, 2021
In Estate Planning
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California’s newly passed Proposition 19 will likely have major tax consequences for
individuals inheriting property from their parents.

Proposition 19 was approved by California voters in the November 2020 election, and will
result in significant changes to the property tax benefits Californians enjoyed previously
under the 1978 Proposition 13 law in effect previously.

Previously, Californian’s who inherited property from their parents enjoyed two tax benefits.
The first benefit, which is unaffected by Proposition 19 is what is call a “step-up in basis”. The
step-up in basis is especially important for anyone selling property. If an individual
purchases a home for 100k and sells it for 500k, then capital gains taxes will be owed on the
400k increase in value since the purchase of the home. Capital gains taxes are based on the
growth in value of the asset. In the above example, that growth was 400k. The advantage to
inheriting property from parents is that the original purchase price (100k in the above
example) is increased to reflect the current market value on the death of the homeowner.
Therefore, the step-up in basis increases the value to the date of death value for the children

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who inherit property. If a child were to sell the above property after inheriting it and
receiving a step-up in basis, then there would be no capital gains taxes unless it sells for more
than 500k. Great for anyone who inherits and decides to sell. But what about those who
inherit property and want to keep it?

For those individuals who decide to keep inherited property as opposed to selling right away,
Proposition 19 will impact the second potential tax benefit, which is how your annual
property tax is calculated. This second benefit was previously available for any property
inherited from parents up to 1 million dollars, or their primary residence of any value.
Property taxes due on a property are based on its assessed value. When a property is sold, the
taxes are increased based on the assessed value. A property which is owned for years is not
reassessed unless there is a change in ownership. Therefore, a property purchased at 100k as
in the above example will continue to have its property taxes charged based on that value.
Prior to Proposition 19, parents could transfer property to their children without triggering a
reassessment. This would allow the children to enjoy the same property tax basis that their
parents paid. Proposition 19 has changed the availability of the exclusion and limited the
amount that may be excluded.

Post February 16, 2021, California Proposition 19 is now in effect. From now on, parent
to child exclusions for reassessment has been limited to only the primary residence. The
primary residence, must be primary for the parents as well as the child who inherits, with a
one year window for a child to move into the property after inheriting. On top of that, this
much narrower exclusion is limited to 1 million dollars. For example, a primary residence
that is transferred to a child with a basis value of 100k that has a current value of 1.5 million,
will still require property tax basis to be increased to 400k (1.5 million – 100k basis – 1
million cap). Again, this exclusion is only available if the parents live in the house and
transfer to a child who then lives in the house within one year. For any property which is not
a primary residence, it will now be reassessed, and the property taxes increased.

Generally, this means that anyone who has owned property for a significant period of time
and expects to pass it to their children will have to consider that their children may have to
pay property tax based on the assessed fair market value of the home. This will significantly
affect whether the child decides to sell the property or keep it, and in some circumstances,
require the sale of the property if the child does not have the resources to pay the adjusted
tax rate. For property that has been owned by a family for decades, and sometimes
generations, this may create a great impact and an upturn in the amount of sales in the
future. However, every situation is different, and you should always contact your attorney to
determine what options are best for you.

Adam T. Belsey, Esq.

Mr. Belsey is a junior associate attorney in our Estate Planning, Trusts, and
Probate practice. He provides thorough, efficient, and individually tailored plans
to fit the needs of every client. In reaching those goals, Mr. Belsey is committed

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to helping you understand the fundamentals of estate planning and trust administration and
the value of planning for your future and the future of your loved ones.

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