Prop. 19, What it Means to You and How to Get Around It …

Prop. 19, What it Means to You & How to Get Around It!

Disclaimer: Nothing in this recording or blog should be construed as legal advice. All viewers need to consult with an attorney and/or tax expert with regard to the topics discussed herein as every situation is unique and there are no guarantees of any particular result or outcome. There are no assurances that the information contained herein is accurate, reliable, timely or complete.

Wondering about Prop. 19? Here’s what it means to you and how to get around it. Under current law (Proposition 58), parents can transfer their personal residence and other real property (with certain limitations) to their children, either during lifetime or at death, and such transfers may be excluded from property tax reassessment. However, Proposition 19 (or Prop. 19), a ballot measure that recently passed, makes significant changes to the property tax law relating to transfers of CA real property between parents and children. Prop 19 also changes the property tax rules for CA residents age 55 or older who wish to transfer their existing property tax base from a current residence to a new home. We have included a video that describes the current CA property tax rules and then explain the effects of Prop. 19. One of the best parts is that it also has information on how to get around Prop. 19!

Following is a partial transcript of our interview with preeminent attorney Debbie Keesey.  Debbie has been an attorney for 26 years and for the past 20 years, she has been in estate planning.  She graduated from UC Berkeley where she got a degree in business and then later on she graduated from Cornell Law School.  She grew up in Torrance.  

Her specialties are in estate planning, will and trust contests, probates and conservatorships. She is part of the Torrance Memorial Medical Center’s Professional Advisory Group, the Healthcare and Elder Law Program, which I was glad to be a part of as well, and she’s a chair elect for the Los Angeles Bar Association’s Trusts and Estates’ Executive Committee and she’s the president-elect of the South Bay Bar Association.

One of the things I wanted to talk about today was Prop. 19. We know there has been a lot of controversy with Prop. 19 and how it was going to amend Prop. 13 regarding our property taxes. If you could touch upon some of the changes that are now occurring as a result of Prop. 19.

So, I’ll start with an overview.

Prop. 13 essentially allowed a homeowner to keep their property taxes low because they would be limited to just the value - the base value of the purchase price.  That’s the cost basis for the property tax assessments. It would be about 1.5% ish and what then went with Prop. 13 was the Prop. 58 which allows a parent to transfer to their child their property tax basis by allowing the child to inherit the house.  So, even if the house was worth $100,000 at the time the parent purchased the house, but at the time of the transfer to the child, the house had appreciated say over 25- 30 years,  the house is now worth $1,000,000- the child could file a Prop. 58 down as the parent-child exclusion from reassessment of property taxes. And that would allow the child to keep the parents’ original property tax basis. 

Say for example, if today they were to get a property worth $1,000,000, they would be paying taxes of around 1.25%, somewhere around there, so they would be assessed based upon that $1,000,000 (value of the ) property. But f the parents, let’s say they had purchased the home at around $100,000 when it was transferred (even if the value was now at $1,000,000), the children would be able to get the tax assessed value at $100,000, instead of $1,000,000.  (See more below to calculate this.)

And at the transfer date, the child for capital gains tax purposes is getting a stepped up basis. If the child acquires the property and it’s worth $1,000,000 (even though the property tax basis is the parent’s original property tax), if they turned around and sold the property tomorrow, there would be zero capital gains because their capital gains cost basis is now the property value (which they are selling the property at). 

So, in California, even though the property prices were very high, you were getting the benefit of this parent-child exclusion from reassessment and the step up in basis.

And there were a lot of groups trying to get rid of that and a lot of people who wanted to keep it. 

So tell us what happened with Prop. 19 because it passed by a very slim margin. Prop 19 gets basically rid of Proposition 58.  That parent child exclusion is highly restricted. Prop. 19 did two other things, it also expanded the rules for the owners aged 55 and older and disabled homeowners and natural disaster victims. But that hasn’t been so much the focus now. It virtually eliminated the parent-child exclusion and the tension of the over 55 base year transfer.

Tell us a little bit about how that works because right now, the kids can still get a tax benefit.  

And by the way, this takes place on February 16th and that is a holiday (the day before), so everyone really has to get their paperwork in and that has to be recorded by February 12th. 

We’re encouraging everyone to do it well before then if you’re going to do the transfer. We think a lot of people are trying to do this at the same time and the Recorder’s Office is going to get pretty jammed up. So the safest thing is to do it as early as possible. 

And do you still have time to help people right now? Yes, on an expedited basis, but you know, it’s going to be really tight. 

We’ll definitely include your information in here because people need to talk to you ASAP. 

So tell us right now what happens with the kids.  Let’s say February 16th comes and goes and now there’s a transfer or a sale of the property to the children.  Now what happens? What do they get, what kind of benefit can they get? What kind of different tax assessments are there? 

If the transfer occurs after February 16th, - if the child is going to make that parents’ property - the parents’ property was their principal residence, and the child is also going to make it their principal residence, there’s still some benefit. They will get to keep this first $1,000,000 at the same tax basis as the parents.  And anything over that $1,000,000 is going to be reassessed. So that tax rate- the tax rate that they are ultimately paying will be a blended rate.

That doesn’t include the income properties right? Right now we’re just talking about the principal residence.

Right - investment properties would not get any benefit from Prop. 19 - like parent-child exclusions any more.  

Let’s say the house was purchased at $100,000 and today it is valued at say $2,000,000, just because of the South Bay, you know there’s a big fluctuation in pricing.  What would the taxes look like? How would we figure those out? 

You take that $2,000,000, subtract off that $100,000- that’s the original basis. And so the first million of that principal residence will be the same tax rate as the parents’ was.  Then the other $900,000 is going to be reassessed at the new rate.  That $900,000 will get the 1.25% tax basis and then they will blend it together.  So that plus the original (whatever it was for the parents).  So not so bad. 

That first million is still at that hundred thousand dollar basis that the parents had. And then again, the income properties - can’t do that. - No- totally reassessed.

What if they decide to move?  Previously people aged 55 and older could transfer their tax base another home if it was the same or lower value.  But only in 10 counties.  What is it now?

Yes, right. And they could only do it once. Now, they can do it three times.  They can move, move, move and it doesn’t have to be equal or lesser value.  Say they had a million dollar house.  They move into a 2 million dollar house.  The first 1 million of that new house will stay at their original tax base, but the amount over that - or the next million - gets reassessed. 

So they get a little bit of a benefit.  It sounds like that first million is what’s key in both sections (of Prop. 19) Both for the kids and for the homeowners themselves.

Right. And they can do it 3 times. 

So one way that people are trying to deal with Prop. 19 right before February 16th …  that people should be thinking about … should I hurry up and try to beat Prop. 19 by making this transfer to my child?  You’re looking at whether the benefit of keeping that low tax basis outweighs the step up in basis that the child would have gotten if they had waited to acquire the property upon the parents death. 

So how do you figure that out?

There are some online calculators, actually.  So every situation is going to be unique because you have a different tax basis, you have differing ages of parents and health conditions.  And whether the child thinks once they have the property, will they hold it, will they sell it? Will they live in it?  So, there’s a lot of things in play that is going to be unique and people need to think about.

So it’s not just like one solution.

(Here it is:  the way around Prop. 19!)

Right and there are some advanced estate planners out there who are using another instrument to try to get the best of both worlds. These are they’re called the intentionally defective grantor trust. What this instrument does is it preserves both a proposition 58 (so you your lower tax basis if you do the transfer before February 16th.  You create this irrevocable trust and in this instrument, there’s something that is included.  A provision called a general power of appointment.  In the Internal Revenue Code, the IRS looks at this power of appointment as the grantor keeping some control so that for gift tax purposes, this is an incomplete gift. 

So that means that until the grantor - the parent - actually passes, the gift is not complete.  So that only upon the grantor’s passing - the parents passing - then you have a completed gift and at that time, the child can also get the step up in basis.

Very interesting.  So is that a little bit like a life estate - like granting the parents a life estate- something similar to that?

A little bit, yes.  The downside to this is you don’t have a lot of time to do this.  But also, these plans -irrevocable trusts can be $12-$13,000 to set up.  I don’t do them personally but I refer them to colleagues who do do them.

Okay, so you do have a way to be able to help people, regardless. 

Yes.

And actually, even if it is $12-$13,000, if you take a look at the potential savings, that might just be one year of taxes, right?

Right. 

I mean if you  look at it that way. 

What if the kids are put - if the children are put onto title now, how would that work?  Would that help them at all? 

If they do it before February 16th, and they file the proposition 58, they’ll get to preserve the property tax basis that their parents had. But then they’re missing whatever appreciation there would have been between the transfer date and say their parent lives another 10-15 years and the property appreciates, another, you know, half a million.  So they’re going to miss out on that half a million step up in basis and and they’re going to pay capital gains taxes if they don’t hold the property and they sell it.  

[For ways on deferring capital gains taxes, please subscribe to my blog on the home page and check back as I will post how to do this without a 1031 Exchange]   

So at some point, when they transfer that property, even if they do all their paperwork before our deadline in February, they still would not have that step up in basis.

They would still have the step up in basis, but only up to the transfer (date), so I am sure there is still some benefit, but not as much as say the parents were going to live another, say, 10 to 15 years.   Property does appreciate.

Oh I know, really.  Do you know in California, I think over the last 50 years, the average is about 7.3%, overall.    So it’s great. Yearly, which is amazing.

It’s really better than stocks. And I know some people are going to say “you’re wrong”.  But the truth is, I mean if you take your investment of let’s say of 10% down.  Let’s say $100,000 down on a million dollar property, you’re getting 7 1/2 or whatever the rate is, over the entire amount - not just on your investment. [For more info, check out my blog here.] 

Whereas with stocks, if you put that hundred thousand, you’re only going to get a return only on that amount.  Not on anything bigger. That is why so many people get into real estate.  So for anyone/everyone out there who’s looking, we can certainly help you.  Debbie and I can certainly provide

you with information on whether it’s really a good idea for you to do anything at this point.  Or if it is, then your planning.  

Well it’s so great thought Clara that you are in real estate now, but you have this great attorney legal background and the legal mind to help your clients in all these ways. 

Thank you. So Debbie is an awesome guide.  She has worked for a number of my clients, so we definitely, highly recommend her.  So if you  want to get in touch with Debbie, her information is going to be at the end of the video, and of course, if you have any questions for me, please feel free to give me a call, I’m happy to help and I’m always here for you.

Debbie Keesey can be reached at : Hansen, Seto, Keesey (310) 944-9800. Again, call me with any questions at (310) 519-7670 or email at MyRealtorClara@gmail.com.

Disclaimer: Nothing in this recording or blog should be construed as legal advice. All viewers need to consult with an attorney and/or tax expert with regard to the topics discussed herein as every situation is unique and there are no guarantees of any particular result or outcome. There are no assurances that the information contained herein is accurate, reliable, timely or complete."