On November 3, Californians approved Proposition 19, a constitutional amendment which had important impacts on property taxes as well as estate planning.

The amendment, which takes effect early next year, provided a new property tax break for homeowners 55 and older who sold their homes and acquired new, more expensive residences.

It also severely narrowed the exclusion from property tax reassessment for real property transfers between parents and their children.

Under present California law, a parent can transfer a principal residence to a child regardless of market value, and the child gets the same property tax value in the hands of the parent.

Not only is that transfer of a principal residence exempt from triggering a property tax reassessment to current market value, but it a;sp applies whether the child uses the property as his/her principal residence or converts it to rental property.

In addition to the unlimited value exclusion from reassessment of a principal residence transfer from a parent to child, current law also provides a parent-child exclusion for transfers of up to $1 million in assessed value of other property, such as rentals. Today a child could receive a parent’s principal residence with an assessed value of $500,000 and keep that value for property tax purposes, even if the residence was worth $5 million when inherited or gifted.

Likewise, a child now can inherit a rental property from a parent with an assessed value of $500,000 and keep that property tax basis, even if such property was worth $10 million (because up to $1 million of assessment value of other property may pass from a parent to a child without reassessment).

Proposition 19 materially narrows the ability between parents and children to transfer real property without triggering a property tax reassessment.

For transfers on or after February 16, 2021, a child acquiring a parent’s principal residence (whether by gift or by inheritance) must use it as his or her own principal residence.

Moreover, the unlimited exclusion in value under the old law has been significantly rolled back. Under the new rules, the parent-child exclusion for a principal residence only excludes an additional $1 million of value over the assessed value at the time of transfer (to be indexed for inflation).

Thus, a transfer of a principal residence with a fair market value in excess of the assessed value in the hands of the transferor parent plus $1 million will result in a partial property tax reassessment.

Proposition 19 now requires county assessors to determine a new taxable value based on a formula that takes into account the difference between the fair market value at the time of transfer and the assessed value of the principal residence in the hands of a parent/transferor plus an additional $1 million.

For example, let’s assume a principal residence was worth $3 million at the time of transfer, and the old taxable value (the assessed value in the parent’s hands) was $500,000. Under Proposition 19, the property gets partially reassessed to a new taxable value of $1.5 million ($3 million full cash market value minus the old taxable value of $500,000 and the $1,000,000 additional exclusion).

Since the fair market value at the time of transfer will have significant property tax consequences, a transferee child should consider submitting an appraisal along with the parent-child exclusion application, rather than relying solely on the assessor’s determination of fair market value.

Proposition 19 will undoubtedly result in significant sparring between assessors and child-transferees about values. Because the new law is effective for transfers on or after February 16, 2021, parents may wish to gift their residence to a child before then to preserve the old property tax base, if circumstances otherwise warrant.

Not only does Proposition 19 adversely impact the favorable property tax treatment of a principal residence transfer between a parent and child, it also totally eliminates the “other property exclusion” for transfers of up to $1 million of adjusted base-year value for non-principal residence property made on or after February 16, 2021. After that date, such transfers will result in a total reassessment to fair market value.

However, Proposition 19 does bring good news for persons over 55 and to victims of wildfires and other natural disasters.

Under prior law, older homeowners could only retain their existing property tax assessed value if they moved to a home of equal or lesser value in either the same county or in one of the 10 counties permitting intercounty transfers. And this was a one-time opportunity.

The new law lets homeowners over 55, as well as victims of wildfires and other natural disasters, buy a replacement property anywhere in California and port over their existing property tax base. Older homeowners can do this up to three times.

If the new home is more expensive than the sales price of the old residence, the difference gets added to the taxable value of the new home. 

Let’s say a homeowner who has a home with a taxable value of $1 million sells that home for $5 million. The homeowner can buy a new residence for $5 million and still retain the old taxable value of $1 million.

If the new residence cost $7 million, then its property tax value will increase to $3 million – the old home’s $1 million taxable value, plus the $2 million difference between the cost of the new home and the sales price of the old one.

Conclusion

Proposition 19’s passage substantially reduced the available property tax benefits of a parent-child principal residence transfer. Under the old law, a residence of unlimited value could be transferred without triggering reassessment, but this is no longer the case after February 15, 2021.

Proposition 19 also eliminated the up to $1 million of assessed value exclusion for non-principal residence property. Accordingly, parents should consider transferring property to their children before Proposition 19's effective date of February 16, 2021, to take advantage of these expiring property tax exclusions.

However, other tax implications must also be considered. For example, gifted property results in a transferee-child getting the same income tax basis as a transferor-parent, rather than a stepped-up income tax basis to fair market that would apply if such property is inherited (which could offset future income taxes).

While the parent-child exclusion has been substantially scaled back, Proposition 19’s expansion of property tax portability is good news for older homeowners (and victims of wildfires and other natural disasters).

If you have questions about the tax or estate planning implications of Proposition 19, contact Michael Morris at 310-601-7004 or This email address is being protected from spambots. You need JavaScript enabled to view it., or any of the professionals at our firm.

By Michael R. Morris