Disclaimer: I am not an attorney and this article is not intended as a substitute for advice from the appropriate legal, zoning, financial, construction and/or tax professionals. This information is provided for educational purposes only and is made without warranties or representations

Property taxes are a huge deal. They’re often one of the largest regular expenses for property owners, but there are protections in place to prevent those taxes from increasing to undue burden at the drop of a hat. Property owners have leeway and a guarantee that the property taxes they’re assessed won’t go up by more than a small amount in any given year. 

Before digging into this tricky subject, a disclaimer: I’m a real estate agent, not a tax specialist or accountant. I’m doing my best to cover a complex topic that’s relevant to my clients, but if you have specific questions or concerns, it’s best to talk to a tax specialist in California for more information.

How California Property Taxes Work

In California, property taxes are set in part by Proposition 13, passed in 1978. This proposition sets the amount of property tax to 1% of the most recent sale price of a piece of property. Further, it limits the reassessment of a property’s value such that the property taxes can’t go up by more than 2% per year unless the property is sold, in which case the value is reassessed to the new sale price and a new baseline for the 1% tax is set.

Of course, this isn’t all that’s included in a typical property tax bill for the average Californian. You also have fees added in from:

• Local taxes and millages.
• Property assessments.
• Mello-Roos Taxes.
• Parcel taxes.

Each year, the assessed value of a property is pushed upwards by the expansion of the economy, the inflation of the real estate market, and the pressures of the government. The cap of a 2% increase is meant to protect property owners from undue hardship caused by excessive increases in assessed value.

What this means is that, very often, those who have owned property for a lengthy period of time are paying far less in property taxes than they would be if they were to buy that same property today. 

Some people argue that this leads to a lock-in effect. Property owners are not encouraged to sell (at least, not their primary residence) because they still need somewhere to live, and if they sell, they end up buying elsewhere, and their property tax bills increase substantially in the process. In fact, many current residents are living in homes they inherited and, through the previous inheritance carve-out exemption, are still paying taxes on a base assessed value from decades prior.

The state and various cities throughout California argue that this has dramatically decreased potential tax revenue that could go into improving the state and the cities in question. Others argue that it’s important to protect residents, especially in a fickle and variable economy, and when the alternative is homelessness, a bit less revenue is a small price to pay.

What is California Proposition 19?

This is where Proposition 19 comes into play. This proposition was on the ballot, and voters decided to implement it. It was passed in November of 2020, and went into effect in September of 2021; now, nearly two years later, substantial resistance to the changes has built up, and an increasing pressure is arguing that it should be repealed. Before we get into that discussion, though, let’s talk about what it is.

There are two aspects of Proposition 19, but the one everyone is most concerned about is officially called the Intergenerational Transfer Exclusion.

This clause, in the fact sheet published by California’s government, reads thusly:

“Allows transfers of a family home or family farm between parents and their children without causing a change in ownership for property tax purposes. It is an exclusion from change in ownership. Allows transferee to retain the taxable value of the transferor. “Taxable value” means the base year value plus inflationary adjustments, commonly referred to as the factored base year value. (Note: In cases where the transferor died, the date of death is considered the date of transfer.)

Applies to a purchase or transfer of a family home between parents and their children if the property continues as the family home of the transferee. The transferee must live in the home as their primary residence within one year of transfer and file for the homeowners’ or disabled veterans’ exemption within one year of transfer to qualify for the exclusion.

• For a family farm, defined as real property under cultivation or which is being used for pasture or grazing or that is used to produce any agricultural commodity as used in Government Code section 51201, there is no requirement that the family farm contain a home that the transferee lives in to qualify. 

• There is a limit to the value that can be excluded for a family home or each legal parcel of a family farm. The value limit is equal to the property’s taxable value (factored base year value) at the time of transfer plus $1 million. If the market value exceeds this limit, the difference is added to the taxable value. (Note: The $1 million allowance will be adjusted annually by the State Board of Equalization (BOE) beginning in 2023.)”

This is a complicated passage for phrasing what basically amounts to “when you inherit property, the value is reassessed just like as if you had bought it, with a few exceptions.” The exceptions include things like family farms and inheritance involving seniors or the severely disabled. I recommend reading the full fact sheet for more information. You can also read the full-length FAQ here.

In practice, Proposition 19 removes the ability for inheritors of property to continue paying much lower property taxes than they would otherwise. While some exceptions exist, they’re rarer and harder to qualify for than they were in the past.

Why People Object to Proposition 19

Proposition 19 has been labeled the “death tax” because it essentially puts a premium on inheritance. Taxpayers who inherit property are faced with the choice: Do they take on a potentially undue and unsustainable tax bill they can’t afford, or do they sell what might potentially have been a multi-generational family home? 

Much has been said about this proposition by its opposition. Jon Coupal calls it a death tax, as does the Howard Jarvis Taxpayers Association. Alex Ramirez bills it as a land grab in a petition to the government. Others call it a bait-and-switch. While it was pushed as a benefit to taxpayers, the truth seems to be anything but.

California is in the midst of a real estate crisis, much like many other areas of the world, particularly major cities. Many residents couldn’t afford to live where they do if they had to buy in today, and whenever a home goes up for sale, it’s more often a speculative real estate management company making the purchase than it is an individual looking for a home. More and more people are reliant on renting, too, which may be a significant part of why Prop 19 passed; since renters aren’t directly responsible for property taxes, they don’t think about it as a significant factor.

Prop 19 is about more than just homes, as well. Local mom-and-pop businesses and other stores are also faced with the expectation of extreme tax bills, even if the business passes from the hands of parent to child. As more and more baby boomers reach retirement age or die, their children are left with expenses they can’t handle if they want to keep a family business going.

Those same renters who don’t consider property taxes are also finding the impact trickles down, as property owners are forced to increase rent to cover property taxes they can’t otherwise afford. Many people are loathe to sell buildings now, and supply is short for everything but the now-vacant office buildings littering the landscape.

“For those who think that Prop. 19 only hurts those who inherit property, guess again. It’s been very bad news for tenants as well. The death tax is contributing to upward pressure on rents because the passing of mom-and-pop landlords triggers the reassessment of buildings to current market value. That means that the big increase in property taxes — as much as 400% — will have to be passed along to tenants, whether the owner’s children decide to keep the property or are forced to sell. If the housing units are under rent control, the building could be sold and demolished, the property converted to another use.” – Daily Breeze.

Efforts to repeal Proposition 19 are gaining support, but the latest appeal lost out 4-3 in the state Senate Governance and Finance Committee. 

Some efforts to force the government to backtrack on Prop 19 have had pretty much no effect, like the Change.org petition. Others, like pressure from various taxpayer and homeowners associations, seem to be gaining more traction.

Will Proposition 19 Be Repealed?

The current efforts to address Proposition 19 center around the Howard Jarvis Taxpayer’s Association and its sponsorship of what is currently known as Senate Constitutional Amendment 4. 

Proposition 19, as a whole, is unlikely to be repealed. There are several parts of the proposition that are beneficial to taxpayers, and in fact, one of the main reasons it passed was because it eased the ability for those who suffered the loss of a home in a wildfire to pick up the pieces of their lives and establish themselves again. 

SCA 4 is meant to reinstate the one portion of Prop 19 that causes so much contention: the exemption from value reassessment for parent-to-child or grandparent-to-grandchild property transfers.

“HJTA recently sponsored Senate Constitutional Amendment 4, a legislative constitutional amendment to restore the family transfer provisions. SCA 4, authored by Sen. Kelly Seyarto with principal co-author Assemblyman Mike Gipson, did not move forward in the Legislature despite compelling testimony at a May 10 hearing in the Senate Governance and Finance Committee.” – HJTA.

While SCA 4 hasn’t passed yet, efforts are going to continue until such time as it becomes a hopelessly lost cause, or progress is made and the exemption is reinstated. 

Protecting Your Future

If you’re a parent and expect to leave your property to your children, or if you’re a child and you’re expecting to inherit property in the near future, chances are you’re going to become keenly aware of this fight and the implications of both sides.

For now, there are relatively few ways that you can prepare for the future in a way that minimizes excess costs.

The first option is to live in the home. One of the less-talked-about clauses of Proposition 19 is the generational transfer exclusion. Many talk as if there’s no way to avoid a reassessment of value upon inheritance, but the truth is, there’s still a carve-out for inheriting a family home if you still live in it and consider it a primary residence. When you inherit the home, you can move into it and occupy it to maintain the prior tax basis. If you move out, though, then the assessment will be recalculated.

“At least one eligible transferee must continually live in the property as their family home for the property to maintain the exclusion. Thus, once the property is no longer your principal residence, it will receive a new taxable value as of the lien date following the date you no longer occupy the property as your principal residence. The new taxable value will be the fair market value of the home on the date you inherited it, adjusted each year after for the inflation factor, and enrolled as of the lien date following the date you moved out.” – CA.gov FAQ

The second option is to use an LLC. Creating an LLC and putting the property under the ownership of the company rather than the individual allows you to circumvent the reassessment, with some caveats. Definitely talk to a lawyer if you’re interested in pursuing that option, however.

The third option is to simply bite the bullet and sell. This applies most to commercial real estate but also to excess properties. If you own your own home already or are satisfied with renting, inheriting a home simply becomes a windfall when you sell. Commercial real estate, meanwhile, can become an investment or a windfall depending on how much effort you want to put into it.

If you own commercial real estate and would rather leave money than property to your descendants, or if you’re inheriting commercial real estate and want to sell rather than deal with property, why not give me a call? As California’s top commercial real estate broker, I can help ensure that you get the best possible deal from the properties you want to sell. Just drop me a line to get started.