What to Do About Potential California Property Tax Changes

Props. 15, 19 could change inheritance, commercial landscapes

California voters in November will decide on two ballot measures that attempt to make some of the most sweeping changes to the state’s property tax law in 42 years. If approved, the ballot measures will primarily impact seniors, inheritors and commercial property owners.

Propositions 15 and 19 would provide a benefit to some, but they would also result in increased property taxes for many who own California property. While nothing is certain, you may want to consider your options for transferring property today to avoid a tax hike, rather than wait until after the election.

Voters decide property taxes

California has a long history of deciding property tax assessments at the ballot box. The cornerstone is Proposition 13. Passed into law in 1978, Prop. 13 helped to keep property taxes under control for both homeowners and commercial property investors by limiting annual tax increases for current owners to no more than 2%, historically well below real estate inflation. Still, when parents transferred property to their children, a full property tax reassessment was triggered, resulting in children paying significantly higher property taxes than their parents did on the same piece of property. To solve this issue, voters later approved measures to allow for transfers of a certain amount of property from parent to child (and sometimes to a grandchild) without reassessment.

Today, voters will consider two measures. One strips most commercial and industrial property owners of Prop. 13 protection. The other will allow some homeowners to transfer their lower property tax assessments to essentially any new residence in the state but will lead to higher property taxes for children or grandchildren.

Proposition 15 — Commercial property

Prop. 15 would require commercial and industrial properties, except commercial agriculture, to be taxed based on their current fair market value (FMV), rather than the original purchase price.

The reassessments would phase in beginning in fiscal years 2022-2023, except for retail centers where small-business owners represent at least 50% of the tenants. For those properties, reassessments will begin in fiscal years 2025-2026. An exception is made for owners of California commercial and industrial properties with combined value of $3 million or less. The measure also reduces taxes on business equipment.

The current property tax formula for residential owners, including multi-family property, would remain the same.

Proposition 19 — Residential property

Prop. 19 makes it easier for homeowners age 55 and older, with severe disabilities or who are victims of natural disasters to transfer their Prop. 13 tax assessment to a replacement home. It also expands tax benefits for transfer of family farms.

If passed, eligible homeowners could move anywhere within California (rather than only to certain counties) and transfer their original property tax assessment, even to a more expensive home. They can do this up to three times. This provision would be effective April 1, 2021.

On the other hand, the measure would limit or eliminate reassessment exemptions for children and grandchildren, which currently include a person’s unlimited ability to transfer a primary residence and up to $1 million of assessed value for any other property. All property transfers would be reassessed, with the exception of a family farm or a family home to a child (or to a grandchild under certain circumstances), provided that child or grandchild also uses the home as their primary residence. However, if the property is worth more than $1 million (the median value of a California home is currently above $587,000), an upward tax adjustment would occur. These rules would go into effect February 16, 2021.

What you can do today

If you own commercial property, you may want to talk to your wealth advisor about how the higher property tax under Prop. 15 could impact your property’s cash flow and your bottom line. Together, you can decide how to pay the tax or whether it might be time to sell.

Prop. 19 would severely limit the ability to pass on property to family without reassessment. For families who plan to transfer real property to children or grandchildren, now may be the time to do so, especially with regard to highly appreciated properties, as this would best leverage the current lower assessed value and the potentially fleeting parent-child and grandchild exclusions.

If you’re considering transferring real property to the next generation but don’t want to make an outright gift, there are other options such as the use of trusts. To learn more about other transfer options, read The 2020 Election and Estate Planning on fathom.