This year, the 2020 election holds many important decisions for voters, especially for California residents. On November 3rd, California residents will do more than elect new government leaders. They will also vote on two separate amendments to the California constitution seeking to change its long-standing real estate tax law – known as Proposition 13. The current version of Proposition 13 in the California constitution was passed by California voters in 1978. It taxes real estate at the price paid for the California property taxes, regardless of when the property was purchased. There have been previous attempts to amend Proposition 13, as recently as 2018, but all have failed.
Understanding Proposition 15 in California
The first amendment California residents will consider is Proposition 15. Under Proposition 15, commercial and industrial real estate properties with a current market value of $3 million or more would be taxed at their current market value. Any commercial or industrial property with a current market value under $3 million would continue to be taxed based on its purchase price. The agricultural property would continue to be taxed based on its purchase price. If passed, the law would be phased in over the next three years. The new tax revenue generated by Proposition 15 would go to public schools, community colleges, and local government services.
The argument in favor of Proposition 15 is that the new tax only targets large corporations, not a small business, and not private homeowners. It forces these corporations to invest in the communities’ education system. The argument against Proposition 15 is that the expense of the new tax will just be passed on to consumers through higher prices of goods and services.
Understanding Proposition 19 in California
The second amendment California voters will consider is Proposition 19. Under Proposition 19, two big changes would be made to the current Proposition 13, both of which relate to residential property and certain family farms. One change affects the ability of certain qualified homeowners to have a new house purchase taxed based on their previous house’s lower purchase price. The other relates to certain qualified heirs retaining the purchase price assessment on inherited property.
Under current law, homeowners who are age 55 or older, disabled, or victims or a natural disaster may, one time in their life, sell their original home or certain family farms, buy a new one of the same or lesser market value, and have the new home taxed based on the purchase price of their original home. Under Proposition 19, those same homeowners would be allowed to do this three times in their life. They would also be allowed to purchase a home with a larger market value and still pay tax based on the original purchase price of their original home.
Also under current law, a child or grandchild can inherit a residential property or certain family farms from a parent or grandparent and the taxation of that property will continue to be based on the parent’s or grandparent’s purchase price as long as the child or grandchild uses that property as a primary residence. If the property is used as a secondary residence, then there is a reassessment to the current market value, but there is a $1 million exemption provided. Under Proposition 19, the tax law tightens. Children and grandchildren who inherit residential property from a parent or grandparent will receive a reassessment to current market value if the property has a value above $1 million, or if the child or grandchild does not use the property as a primary residence.
Lastly, Proposition 19 would create the California Fire Response Fund (“CFRF”) and the County Revenue Protection Fund (“CRPF”). The amendment requires that 75% of its revenue be funded into the CFRF for fire suppression and staffing. It also requires 15% of its revenue to be funded into the CRPR to help counties offset any revenue loss caused by the amendment. The remaining revenue would go to public schools, community colleges, and local government services.
The arguments in favor of Proposition 19 are that it likely will result in more homes being sold which in turn stands to generate more tax dollars to fund firefighters, schools, and government services. The arguments against Proposition 19 are that it curtails the ability for longtime homeowners to pass down a tax break to heirs and skews tax breaks away from those that do not yet own a home or are struggling to buy one
Both measures are very important and can impact you and your loved ones. If you have questions on how either Proposition may impact your estate plan, please don’t hesitate to reach out. Contact us or schedule an appointment with our experienced Irvine, CA estate planning attorney today.
