Financial News – January 2021


Prop 19 Creates Planning Need

    The most prominent Proposition 19 ads marketed the law as a loosening of rules to assist wildfire victims. The recently passed proposition accomplishes that, but is likely to impact more Californians and Orindans through less advertised changes to the portability of tax valuations.
    Most notably, the law allows residents over age 55 up to three transfers of their home’s tax assessment to a new primary residence anywhere within the state. Transfers to more expensive properties will now increase assessed value by only the difference in market price – if you move from a $1 million property to a $1.5 million property, then your assessed value will increase by $500,000. Assessed value transfers to an equal or lesser property, stay the same.
    Residents with severe disabilities and – as advertised – victims of wildfires and other disasters are also eligible.
    This replaces a regimen in which only one transfer was allowed to a property of equal or lesser value, typically only in the same county.
    With this change, empty nesters and others over 55 will have less financial incentive to stay put or convert a primary residence to a rental to take advantage of a low assessed value. On the other side of that coin, this creates (unintentionally) an incentive for the not quite 56 age group to defer moving until they too qualify to carry their assessed value with them.
    A second change from Prop 19 affects the rules for all assessed value transfers to children and grandchildren, but these will become more restrictive. Only a property that is the primary residence (called “family homes” in the proposition) of both the transferor and transferee now stand to receive a benefit. Before, all property was eligible. The maximum benefit is now capped at a $1 million downward adjustment to market value upon transfer.
    Let’s look at an example to see how this works: Suppose Grandma had a $500,000 assessed value on a $2.5 million family home when transferring it to grandchild. Grandchild would then receive the maximum $1 million downward adjustment to assessed value, resulting in a new assessed value of $1.5 million.
    These new rules take effect Feb. 16. Before you rush out to transfer properties to would-be heirs, consider that a gift will not receive a cost basis step-up – potentially costing much more in capital gains if sold and lower depreciation if rented than saved, on property taxes.
    Those with larger real estate portfolios may soon ponder the “Ship of Theseus” – an ancient Greek thought experiment in which every part of a ship is replaced one by one. Doing so might beg the question as to whether you end up with a new boat. Similarly, if property ownership turns over in this way, California law doesn’t recognize that ownership (or tax assessment) changed at all.
    The Theseus exemption has inspired several unpassed state bills and the failed Proposition 15 that would have shrunk the exemption. While they are not law yet, they represent potential changes to consider in any planning.

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