The Future of Prop 13 After Prop 19 and Prop 15

While most people were focusing on the Presidential Election as well as Congressional races during the November 2020 General Election, California voters were being asked to approve various propositions. One measure that passed was Proposition 19. Some feel that Prop 19 may be the first salvo toward reversing the protections that Prop 13 provides to California property owners.

Another proposition in 2020, Proposition 15, was directed at owners of large commercial, non-residential properties with a combined value of more than $3 million, requiring them to pay the real property taxes at the current market value and not the purchase price basis as Prop 13 provides. Opponents of Prop 15 pointed out that this was reversing some of the tax advantages that property owners have under Prop 13.

Proposition 19 was marketed as protecting the tax basis for senior citizens, the victims of wildfires and natural disasters as well as those who are disabled. One less well-known consequence of the passage of Prop 19 was that the parent-child exclusion has been seriously impacted. Interestingly, the tax basis protection for the disabled, senior citizens and those displaced by wildfire or natural disaster already existed. Prop 19 modified these provisions some.

Prior to February 16, 2021 (the day Prop 19 became law in California), parents could transfer their real property in California to their children without the real property being reassessed. This allowed the child to keep their parents’ lower property tax value. However, Prop 19 made this parent-child exclusion must less desirable than it was previously. It should be noted that Prop 19 also affects grandparent-grandchild exclusions in a similar fashion.

Under Prop 19, parents can only transfer the parents’ primary residence to their children. Further, the value of the exclusion is only for the first $1 million dollars of current market value. The child must move to the property within twelve months of the transfer, making it the primary residence for the child, and must file for homestead exemption on the property. If the property is not the primary residence of the parents at the time of transfer or the child does not intend to live in the property, then the property is reassessed at the then-current fair market value.

Prop 19 allows disabled persons, persons displaced by fire or natural disaster, and those 55 and old to transfer their base year value to their replacement home if they purchase another home in California within two years of the prior sale. This provision can be used for up to three times by the disabled and senior citizens. Previously, replacement homes had to be in the same county but now the replacement property can be anywhere in California. There is also no limit on the value of the replacement home but the value in excess of 100% is added to the transferred value.

It is now more important than ever to make sure that if you own your principal residence in California, you have filed for the homestead exemption in order for your child to qualify for at least some of the parent-child exclusion in the future if a child will ultimately inherit your home.

After the economic downturn over the past year due to COVID-19 as well as the $54.3 billion deficit in State of California’s budget, it is likely that there will be further efforts to reduce or repeal some or all of Prop 13’s tax benefits through propositions we saw in 2020 although the proponents of any such proposed propositions will likely not frame them as such.