Mediation in the Age of the New Increased Real Property Tax Transfers Implemented by Prop 19

Under the current property tax law, parents can transfer to their children (and under some circumstances to their grandchildren) their primary residence, worth any amount, AND a property worth $1 million of assessed value without triggering a reassessment of the property for property tax purposes. As a result, two parents could transfer their primary residence and another $2 million of assessed value of real property without triggering a property tax reassessment.

As of February 16, 2021, per the provisions of the new Proposition 19, children or in some circumstance grandchildren inheriting a real estate property from a parent will still be entitled to the same portion of the inherited real property but it will be subjected to a new taxation system .i.e. the elimination of parent-child and in some cases grandparent-grandchild exclusion from property tax reassessment unless the following two conditions are both fulfilled:

1). The child or under some circumstances to the grandchildren MUST use the transferred property as their primary residence within one year of the property's transfer;

2). The primary residence exclusion is limited to the first $1 million of assessed value of the property at the time of death or of the transfer by sale or gift.

The current exclusion from reassessment for a non-primary residence of real properties is eliminated. The deadline to transfer real properties without triggering the new reassessment rules under Proposition 19 is February 15, 2021.

Below is an example to better understand the new property taxation rule and why it could easily generate conflicts between family members:

Mom dies owning her principal residence that she bought many years ago that has a property tax of $4,000 per year and a current assessed value of $1 million. Mom also owns another property with a current assessed value of $1 million.

Child #1, receives Mom’s principal residence valued at $1 million and makes the property his/her principal residence. As a result, child # 1 will be allowed to keep Mom’s current property tax value for this property. Child #2, receives the other property also valued at $1million.

This would appear to be an equal distribution with each child or grandchild receiving property with a value of $1 million. But if we assume that the property tax will increase 2% each year and that the property Child #2 is receiving will be reassessed generating a property tax based on 1.25%, then over the next ten years child or grandchild #1 will pay $776 in property taxes and Child #2 will pay $136,867 in property taxes.

As mediators, we already know that this new legislation will create tensions among family members with regards to the distribution of inherited real estate assets both pre-mortem between parents and siblings, and/or grandchildren as well as post mortem between the heirs (children and/or grandchildren). At Mediation Path, we can assist you:

1). As parents and/or grandparents in planning how you would like your real estate assets to be partitioned between your heirs by creating a plan that your children and/or grandchildren will understand and feel is fair;

2). As heirs, upon a parent or a grandparent's death, to help your family reach a negotiated settlement which will take into account the new rules put in place by Proposition 19 and allow each heir to evaluate and understand the true value of the assets included in the estate.

In a nutshell, if the issue of property taxes arises within a family, contact MPSV. We are aware of the changes in the law and can assist families regarding property tax issues and any other trust and estate disputes.