Estate Planning in Roseville and Greater Sacramento areas was complicated by Proposition 19 (see our article on Prop 19). To avoid Prop 19 reassessment damage you’ll need to act fast, be prepared to pay for immediate help, and work with the right estate planning attorney. Keep in mind that tax laws change all the time and you’ll have to adjust your strategy again if the tax code changes. That is why it is really important to speak to an estate planning attorney now to see if you should execute your plan prior to February 16, 2021.
Here are some Prop 19 reassessment basics to see if you need to do something right away and answers to frequently asked questions.
Note: Because President’s Day falls on Monday, February 15th, if you choose to use a Prop 19 mitigation strategy then you MUST have your plan in place by February 13, 2021.
“Basis” and Prop 19 Reassessment
We are seeing a lot of confusion regarding “basis,” mainly because this term is important to Prop 19 and California’s property tax structure. First, “basis” in tax language is “the amount paid for property.” When you sell property for more than the basis, you have made a profit – the IRS expects you to pay taxes on these profits. Second, your basis in real property is used for two purposes: 1) to determine profits for capital gains taxes, and 2) to determine the property value for property tax reassessments in California. The basis rules for capital gains are not changing in California.
Reassessment – The Changes
The big change under California law is that property will be reassessed in many cases when it passes to children. The only exception to reassessment is one property used as a primary residence passed to a child who will ALSO use the home as a primary residence and the value of the home does not exceed basis plus $1million. Let’s unpack this with an example.
Let’s say you purchased a home for $300,000. This is your basis. Let’s also assume that your child will inherit your primary home and continue to live there as his/her primary home. If the value of the home when you die is no more than $1.3million there will be no reassessment. The tax basis of $300,000 plus the $1,000,000 exemption is sheltered from reassessment. However, if the value of the home is $1.4million at death, the $100,000 difference is reassessed (a very modest increase).
Who Benefits from Prop 19 Reassessment Planning?
Do you own multiple rental properties and you want your children to get this income after you pass? If so, you would benefit from Prop 19 reassessment planning. If you own multiple homes and multiple children that are currently living in your other homes then your family would benefit from a Prop 19 plan.
What is a Prop 19 Trust?
A Prop 19 Trust is a permanent solution to avoid reassessment. It isn’t for everyone, but it can avoid a huge reassessment on certain property and save the next generation from paying higher property taxes. It is a method of freezing property tax rules under the pre-Prop 19 laws while retaining the benefits of ownership and leveraging the the estate tax unified credit.
Do I Need a Prop 19 Trust?
Not everyone will need a Prop 19 reassessment plan. The basic rule is, if your child won’t live in your primary home when you pass then you won’t benefit from a Prop 19 Plan.
Do your children own their own homes and have school-aged children? If so, they likely will want to keep their children in the school district, close to their network of friends, coaches, and mentors.
Is your plan to sell off your properties when you pass? If so, then it doesn’t matter to your family if there is a reassessment when your children won’t own the property any longer.
Some children don’t want to work in the family business. Does this describe your children? If so, your investment property empire won’t likely survive the next generation and should be liquidated or merged with another company (note: we advise family businesses, too).
There are other risks, as well. The permanency of Prop 19 plans triggers annual administrative costs, additional annual tax returns, and other penalties that may outweigh the advantage of Prop 19 reassessment planning.
What Happens if the Law Changes?
Tax laws change all the time. It was rather surprising, despite most major California newspapers recommending a “No on 19” vote, that Prop 19 passed. It is possible that the law is repealed in the future since it narrowly passed in the first place. Also, keep in mind that Prop 19 plans are permanent and are therefore very difficult to change if the law is repealed or you change your mind.
However, if your estate is swimming in equity and you want to protect the property tax value for your children, you need to act now.
Talk to a Sacramento Area Probate Attorney today! We have very limited appointments available for this kind of planning.