Because of Proposition 19 should I give my house away?

Q: I hear that because of the passage of Proposition 19, we should consider giving our real estate to our children now if we want to take advantage of the old Proposition 13 parent- child property tax reassessment exclusion. I think I understand about half of Proposition 19; so complicated! Do we need to take action now and, if so, what sort of things should we take into consideration?

A: If you understand half of the recently passed Proposition 19, you are ahead of most professionals and the California State Board of Equalization the agency tasked with enforcement of the new law. It is complicated. Before delving into Proposition 19 and whether you should give your property away, let us look at some background.

Since the initiation of Proposition 13 in 1978, Californians have enjoyed a parent-child exemption when it came to passing real estate to children upon death. In short, this proposition, coupled with the later Proposition 58, made it possible to give a residence or investment real estate (to certain limits) to children and not have the property reassessed for property tax purposes. In some cases, the exemption extended to grandchild inheritance, as well.

For example, under the prior propositions, if I bought my home years ago and have paid $5,000 a year in property tax, I can pass the property to my son on my death and, in addition to the real estate, my son also “inherits” my existing property tax bill. This lower tax bill would remain although the property tax if reassessed at current property tax rates, would be greatly higher. This made it very attractive for children to retain the family home.

On Nov. 3, California voters approved Proposition 19 with just 51.11 percent of the votes. This change in law limits or completely takes away the prior property tax reassessment exemptions. While the nitty-gritty of the new law is beyond the scope of this column, in a

nutshell, if you die owning real estate after Feb. 16, there will be significant changes in the property tax basis even if you leave your property to your children.

Under the new law, commercial or investment property will be fully reassessed for property tax purposes. The

family home will be reassessed under a convoluted formula that includes the original property tax basis and an additional $1 million exemption.

Should you gift your property to a child before the exemption changes? Possibly. If you gift your home to a child today, they are now owners and you may need to make rent payments. It is also possible to give your real estate to an irrevocable trust which will hold the

property until your death.

If gifting our property to a child now, they will have year-to-year lower property tax, but they also receive the property with your cost basis which means if they sell the property later, they will have higher capital gains tax. If you hold the property to death and then pass it to your child, the property should receive a “stepped-up basis” which means they inherit the property with a cost basis at the current value.

Various tax laws come into play with this new

Proposition so you should contact your advisors who can put pencil to paper

(or numbers in an Excel sheet), to see what works best for you. Liza Horvath has over 30 years’ experience in the estate planning and trust fields and is a Licensed Professional Fiduciary. Liza currently serves as president of Monterey Trust Management. This is not intended to be legal or investment advice. If you have a question, call (831) 646-5262 or email liza@montereytrust.com