It’s hard to imagine anything callous than the government sending a huge tax bill to a bereaved family, but thanks to Proposition 19, many California families will have this unfortunate experience.
Prop. 19, which was passed thinly in the November elections, expanded a tax break for some homeowners, but abolished an important tax protection for families. The effective date for this change was February 16, before most Californians even knew what had happened.
Here’s what happened: Homes that are transferred between parents and children are no longer excluded from reassessment. Previously, children continued to pay the same property tax bill that their parents had paid, whereby the value limited by Prop. 13 was increased to a maximum of 2% per year. No more. Now children who inherit their parents’ house or other property will receive a new tax burden based on a current market price.
There are limited exclusions for a family business and for a house that is the parent’s primary residence if the house becomes the child’s primary residence within a year. Otherwise, the home and other properties such as small businesses or rental homes will be re-valued at the time of transfer. The new annual tax rate is 1% of market value, which easily doubles or triples the property tax rate on most of the transferred properties.
Unfortunately, the costly advertising campaign promoting Proposition 19 never mentioned the loss of that protection from “intergenerational transfers” and the fact that this happened to families in the midst of a pandemic made it difficult or impossible to obtain information or even documents from government officials to record. There was little time until February 16 to consult a lawyer or revise an estate plan.
As families discover the harm of Prop. 19, more and more people are turning to the Howard Jarvis Taxpayers Association and telling us they want to see the re-evaluation exclusion for parent-to-child transfers of property again. Do we agree? We call on the legislature to support a change in the law that reverses the harmful part of Prop. 19 and restores the protection of the constitution, which it has tacitly lifted.
HJTA is also sponsoring Senate Draft 668, authored by Senator Patricia Bates, R-Laguna Niguel, to postpone the coming into effect of this part of Prop. 19 for two years until February 16, 2023.
Such a delay is within the power of the legislature. Although the effective date of the measure is now part of the state constitution, a 2007 court ruling in the case of Strong v State Board of Equalization ruled that the definition of “change of ownership” could be legally changed. This provides a means of redress for pandemic-weary Californians now at a time of death threatened by a sudden and prohibitive tax hike.
We now know that Proposition 19 had blind-sided voters who were never informed of its real implications. The exclusion of parent-child transmission from the reassessment was incorporated into the state constitution in 1986 through Proposition 58. California voters had already abolished state inheritance taxes and banned future inheritance taxes, but as property increased in value, children who had inherited their parents “real estate was equated with inheritance tax when the property was handed over to them and revalued to market value. Children who could not afford to pay taxes had to sell the family property.
The uproar was such that the state legislature unanimously passed a proposed constitutional amendment that enacted the exclusion of parent-to-child transmission and included Proposal 58 in the vote. It was approved by more than 75% of voters. Prop. 58 also wrote in the constitution what had already been incorporated into state law: property that was passed on between spouses was excluded from the reassessment.
Senate Bill 668 would extend the time before “change of ownership” would be defined as a parent-to-child transfer of a home and other property.
This is an extremely important piece of legislation not only for California families who will suffer from Proposition 19, but also for county assessors and the State Board of Equalization. Due to the rapid implementation date for changes to Proposition 19 in intergenerational transfers, the examiners and BOE members endeavored to obtain answers to a long list of specific questions that were unclear or ambiguous as a result of the measure. SB 668 would temporarily allow for a more orderly and equitable process of taxing property that would be passed on to the next generation.
In the longer term, the exclusion of parent-child transmissions according to Prop. 58 should be reintroduced in its entirety. Californians willing to join this struggle should reach out to their state officials – you can find it at findyourrep.legislature.ca.gov – and urge them to restore Prop. 13 for our children.
Jon Coupal is President of the Howard Jarvis Taxpayers Association.