Wednesday, December 16, 2020 / by Dave Salzman
Written by Carol Glover
In the wildly successful Netflix series, The Queen’s Gambit, Beth Harmon envisions well in advance her chess moves. It is her talent and leads to her success. What does this have to do with Proposition 19? Like Beth, you should practice your moves before acting. Do not be tempted to move too quickly or erratically just to beat the upcoming deadlines.
- Transfer of Tax Basis for Seniors (age 55+), severely disabled, or wildfire and natural disaster victims.
a. This one is a WIN for Seniors, Severely Disabled and Victims of Wildfires and Natural Disasters
b. Effective Date – April 1, 2021
c. What are the improvements over the old Proposition 60/90?
i. You can sell your current home and take your current property tax basis with you to a new residence ANYWHERE in the State of California.
ii. You can do this up 3x in your lifetime assuming you have not done this before.
iii. You can buy a more expensive home than the one you sell, but if you do, your new property tax basis will be a blended rate of your current property tax basis + the difference between the value of the property sold and the new, higher value.
WARNING: You must apply for this exemption. It is not automatic and the transfer to the new home must be done within 2 years of the sale of your principal residence
The moves. Should you wait to sell until this law becomes effective on April 1, 2021?Some analysts say wait to sell until on or after April 1st. You will ensure that you are within the statutory effective date, you will have access to the 3x transfer option, and you will be able to purchase a higher price property if you so choose. However, others take the position that as you have two years to affect the transfer to the new residence post the sale, that you could sell now and file for the exemption to a new residence purchased after April 1st, 2021. Therefore, you will need to discuss the risks with your advisors.
2. Transfers between Parent/Child (Prop 58) and Grandparent/Grandchild Transfers (Prop. 193) Modifications due to Proposition 19. [for simplicity, we will only discuss Parent/Child, but be aware that there is Prop. 193 Grandparent/Grandchild transfers and that 58 and 193 apply in either direction—meaning children can transfer to parents and grandchildren can transfer to grandparents (if the parent is deceased).
d. This section of the new law is a LOSE for those who planned on passing their low property tax basis residence or 1 million worth of other property to their children. The WIN is for the programs that are benefiting from the increased property taxes to fund the measure. According to California Association of Realtors, the WIN is also the increase in sales inventory that will reach the marketplace as the enticing low property tax basis disappears for heirs and they or their parents decide to liquidate the property that would have otherwise been kept in the family.
e. Effective Date – February 16, 2020
f. When effective parents/Children and Grandparents/Grandchild can only use the property tax transfer exemption for the donors’ personal residence if the gift or bequest recipient lives in the property as their own personal residence. Use of the gifted or inherited property for any use other than a personal residence voids the low property tax base transfer.
g. Also, the recipient only gets the full benefit of the exemption if the market value of the home transferred does not exceed the tax basis transferred plus $1m. If the value exceeds that amount, then the recipient pays property tax based on the blended rate of the lower tax basis + the current value on the difference.
i. Example 1: Parents gift their personal residence to their child. At the time of the gift, the property tax value is $500,000. The market value is $1.5m. The child can keep the low tax basis of $500,000 (subsequently increased annually) because $500,000 tax basis + $1,000,000 in value = $1.5 and meets the exemption test.
ii. Example 2: Parent gift their personal residence to their child. At the time of the gift, the property tax value is $500,000 and the market value is $2,000,000. [$500,000 + $1,000,000 = $1,500,000 but the market value is $2,000,000 so the property tax is the OLD rate based on $500,000 + a new applied tax rate to another $500,000 so it is a blended property tax because the market value exceeds the property tax basis rate plus $1,0000,000.
h. There is a complete elimination of any other property tax basis transfers. Prop. 58/193 provided that a parent could gift/bequeath property OTHER than a personal residence up to $1,000,000. [e.g., Commercial building, apartment building, vacation property etc.] This is now gone.
i. Beware that this exemption requires a filing with the Assessor’s office within one year of the transfer under the new law.
So, the bottom-line rules on the property tax basis transfer to under Prop. 19, the child transferee must make the inherited/gifted property their personal residence and the benefit has a $1,000,000 cap over the property tax value at the time of the gift.
What are your moves BEFORE the February 16, 2021 deadline on the existing property tax transfers and AFTER the April 1, 2021 moves if you are over 55, severely disabled or a victim of wildfire or natural disaster?
If you are over 55 and want to move - since the new law is not effective until April 1, 2021, the safest move is to NOT move until after April of 2021. However, some commentators are of the opinion that if a person has two years to make the transfer AND the new home can be purchased before the sale of the current personal residence and the sale occurs after April 1, 2021 and the election is taken AFTER April 2021, the property tax basis transfer should be honored. However, this is not the safest move, as the legislation is not clear on this point.
If you are a Parent or Grandparent and plan on gifting before February 16th, you need to understand the practical and estate planning consequences of the gift, the tax impact it will have on the recipient of the gift because the recipient receives that parents’ tax basis in the property for capital gains rules and the tax to be paid on those gains in the future. We also suggest reviewing the Biden proposal regarding estate tax exemption limits and capital gain increases. Each of these are factors that will need to be played out in various scenarios.
There are multiple options to consider that touch on estate planning, taxation, highest and best use of the property, value of the property to be transferred and use by the beneficiary of the gift. The tax consequences are critical, and the chess moves must be played, but get the chess board out now, as the opportunity to transfer parent to child under the existing rules ends February 16, 2021.
As for the move of the property tax basis by someone over 55+, severely disabled or wildfire or other disaster victim, the future is brighter after April 1, 2021, but delays may have other lifestyle and/or sale consequences. Play out all the moves, then decide!