Your kids may have to pay more property taxes after you're gone
In 2020, California voters approved Proposition 19, the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment (2020) to take effect Feb. 1, 2022. Presumably, they thought disadvantaged homeowners (those who are disabled, older than 55, or wildfire victims) should be able to transfer their property tax base when they purchase a new primary residence outside their county. Unfortunately, like so many things, you had to read the fine print to see that the proposition came with some serious downsides.
While the measure does allow homeowners to take their property tax base with them if they sell their current primary residence and buy one in a different California county, it also eliminates the ability of property owners to pass on the tax base of any investment property to their children upon their demise.
That means, when I die and my children inherit my real estate holdings, the property tax base will be reassessed based on current market values. If they happen to move into my current home and make it their primary residence, that property would maintain its current tax base, but the others would all jump significantly.
Why does this matter? Imagine your parents purchased a home in the Oak Manor subdivision in the 1970s for $20,000. Because of Proposition 13, the property tax basis has only increased by 2 percent a year, so the tax base is now $55,000, even though the market value is closer to $500,000. Under this new law, once your parents pass away and you inherit the property, the tax base will be reassessed and the new tax base will be market value. That means the annual property tax bill will go from about $600 to about $6,000.
This is a bummer for everyone who inherits property, but for some, it could be catastrophic. Farming and ranching properties are often passed down through generations. Let's say we're talking about a cattle ranch with an annual profit of $50,000. Although it serves as a residence, it is also considered an investment property and the fair market value of the property is in the neighborhood of $1.5 million. If the next generation had to pay property taxes on the reassessed value, their annual payment could go from about $1,000 to $15,000 — $20,000. That really cuts into their profit.
A new petition is being circulated which would allow homeowners to transfer their property tax base to another county but undo the changes that force a tax base reassessment upon a property owner's death. Although this would be good for property owners and their beneficiaries, it would reduce tax revenue for cities, counties, special districts, and state coffers. Personally, I favor allowing people to keep their money, but if you agree with how tax dollars are spent, you may feel differently.
If the petition doesn't pass, as time goes on, there will be more pressure on all kinds of investment property to be liquidated upon the death of the current owner. In agriculture, this will likely result in breaking ranches into smaller pieces, which may end up becoming single-family housing subdivisions. This will help alleviate the housing shortage, but it would come at the cost of converting ag land to development. Eventually, it could transform the nature of this valley.
If farming isn't profitable, people will have to find another way to support themselves. As we've seen during the pandemic, more and more people are moving to our community who do not make livelihoods based on local employers. Telecommuting may become the norm. I have a friend who lives in Sebastopol and telecommutes to Chicago. This would never have happened 20 years ago.
I prefer to deal with local people, but I can see that some brickand-mortar businesses may become less necessary. Maybe Ukiah will become a distribution hub for online retailers. Maybe we should all be investing in delivery companies like Fedex and UPS. Or maybe we should encourage our children to go into the service sector — you cannot get a remote haircut or fix a leaky pipe via Zoom. It'll be interesting to see how things change, and how they stay the same.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I'll send you a $25 gift certificate to Schat's Bakery. To see previous articles, visit www.selzerrealty.com and click on “How's the Market.”