Navigating Legacy Planning: Understanding the Impact of California's Prop 19 on Investment Property

Introduction:

In November 2020, California voters passed Proposition 19, a ballot measure that significantly impacted property tax rules in the state. While Prop 19 addresses various aspects of property taxation, its implications on legacy planning, especially concerning investment properties, have garnered attention. This article delves into the key provisions of Prop 19 and explores how it influences the landscape of legacy planning for investment properties in California.

Proposition 19 Overview:

Proposition 19 introduces changes to the state's property tax assessment rules, primarily focusing on property transfers between family members and the taxation of inherited properties. The two main components of Prop 19 relevant to legacy planning are the modifications to the Parent-Child and Grandparent-Grandchild Exclusion and the creation of the California Fire Response Fee.

1. Parent-Child and Grandparent-Grandchild Exclusion Changes:

• Prop 19 narrows the eligibility for property tax reassessment exclusions for transfers between parents and children or grandparents and grandchildren. While the previous rules allowed for the transfer of a primary residence without triggering a reassessment, Prop 19 limits this exclusion unless the transferee occupies the inherited property as their primary residence and the property has a taxable value close to the market value.

1. Inherited Properties and the California Fire Response Fee:

• Prop 19 imposes a new "California Fire Response Fee" on inherited properties not used as a primary residence by the transferee. This fee is intended to fund firefighting efforts in the state. If the inheritor decides to use the property as their primary residence, they may be eligible for a property tax reassessment exclusion.

Impact on Legacy Planning for Investment Properties:

1. Increased Property Taxes for Non-Primary Residences:

• Investors and individuals inheriting investment properties may face higher property taxes under Prop 19, especially if the inherited property is not used as the primary residence. Legacy planners must consider the potential tax implications when devising strategies for passing on investment properties to heirs.

1. Strategic Planning for Primary Residence Transfers:

• Legacy planning for primary residences becomes a critical aspect under Prop 19. Transferring a primary residence to a child or grandchild may still qualify for the reassessment exclusion, but planners must carefully assess the property's value and the intended use by the inheritor.

1. Evaluating Alternative Legacy Planning Strategies:

• Given the changes brought about by Prop 19, individuals engaged in legacy planning for investment properties may need to explore alternative strategies, such as creating trusts or considering different types of property transfers, to minimize the impact of increased property taxes on the inherited assets.

Conclusion:

California's Proposition 19 has redefined the landscape of property taxation and legacy planning, particularly concerning investment properties. Legacy planners and property owners need to stay informed about the intricacies of Prop 19 and its implications to make informed decisions about how to pass on their assets to future generations. By carefully navigating the new rules and considering alternative planning strategies, individuals can adapt their legacy plans to align with the evolving regulatory environment in California.