California Proposition 19 was passed in 2020 and went into effect on February 16, 2021. It was intended to remedy some of the distortions created by Prop 13 by making it easier for older Californians to move from their low-basis and highly-appreciated properties to other areas of the state without taking a large property tax hit in doing so. The perceived problem was that older Californians were reluctant to move from their low-basis property in or near urban centers because they didn't want their property taxes to skyrocket. That created a logjam where retired people were staying in high-cost areas such as the San Francisco Bay Area, Los Angeles, and San Diego, making it difficult for younger workers to purchase in areas with a reasonable commute. The thinking was that by making it easier for older, retired people who might not need to live near work anymore, they would move to less-congested, lower-cost areas, freeing up housing for younger workers.
All great so far. But Prop 19 giveth and it taketh away. In addition to loosening the restrictions on moving while taking the low property taxes with you, the proposition also contained language that make it more costly to pass down property to your heirs. To simplify considerably, parents are only able to pass down their low tax basis to their children in one scenario: when they pass down their principal residence and the child then lives in the home as their principal residence. Even in that scenario, properties of more than $1M may be partially or completely reassessed, wiping out part of the low basis property tax benefit. The math and restrictions can become very complicated. For example, the child needs to fully occupy the home within one year of the death of the parent. To avoid reassessment, the value of the home must be less than the factored base year value plus $1 million (indexed for inflation).
There are some strategies for limiting the tax impact of Prop 19, but they are certainly more limited than before the passing of the bill. What used to be a fairly straightforward analysis now involves complicated contortions (for example, some attorneys will help high net worth individuals create LLCs as a transfer vehicle, etc.). Things also get complicated when there are multiple siblings - what is the value of the low cost tax basis in dividing up the estate? That is, if one sibling moves into the property and gets the tax advantage, how does that impact the equity between the beneficiaries?
Given the complexity of the new law and the untested nature of some of the edge cases, anyone who is planning to pass down property in California, particularly if the property is worth more than $1M , should work with an estate attorney who is intimately familiar with the new conditions. You may want to revise your trust and will to adjust to the new law and avoid a nasty tax surprise for your heirs.
