The Impacts of Prop 19

Proposition 19 changed the rules for inheriting California property in 2021, and we still have this conversation with clients regularly. Most people either do not know the rules changed, or they think they do and have it wrong.

Here is what actually happened.

Before Prop 19, a parent could transfer a primary residence to a child and the child could inherit the parent's low property tax base regardless of what the child did with the property. Vacation homes and investment properties also qualified, up to one million dollars in assessed value. It was a significant benefit that California families had been planning around for decades.

Prop 19 largely eliminated that.

Under the current rules, a child can only inherit a parent's property tax base on a primary residence, and only if the child moves into that home and makes it their own primary residence within one year (and even then they only have protection up to $1 million of increased value). If they do not move in (or once they move out), the property is reassessed at current market value. For families with longtime California property, that reassessment can mean a dramatic increase in annual property taxes.

Vacation homes, rental properties, and investment properties no longer qualify for the exclusion at all, regardless of value.

A misconception we see constantly: people believe that holding property in a revocable living trust protects it from reassessment. It does not. A revocable living trust is transparent for property tax purposes. The exemption analysis looks through the trust to the actual transfer of beneficial ownership. Putting a property in a trust does not change who owns it or what happens when it passes to the next generation.

For clients with appreciated California real estate, Prop 19 is one of the most important things to understand when thinking about what they are actually leaving behind. The property tax implications can be just as significant as the estate tax conversation.

Frankly, there is not much that can be done about this from a planning standpoint. Short of a change in the law, families inheriting California property need to understand the new reality and plan around it rather than expect to avoid it.

It is worth having a real conversation with an estate planning attorney about what a property tax reassessment could mean for your beneficiaries. A significant increase in annual taxes can affect whether keeping the property even makes sense. That conversation is worth having before it becomes someone else's problem to figure out.