Proposition 58 in California’s real estate law has been an essential part of real property transactions for families, particularly when transferring property between parents and children. However, it’s crucial to understand that Proposition 58 only applies to trust administrations with a date of death prior to February 15, 2021. For any deaths occurring after this date, Proposition 19 has replaced Proposition 58, bringing changes to how property tax exclusions and transfers are handled.

In this article, we’ll discuss how Proposition 58 worked, what changes Proposition 19 introduced, and what that means for real estate transactions in California today.

What is Proposition 58?

Proposition 58, passed by California voters in 1986, allowed parents to transfer their principal residence and other real property to their children without triggering a property tax increase. This exclusion from property tax reassessment provided significant property tax relief to families, allowing them to pass on properties at the original taxable value, thus avoiding a reassessment based on the current market value at the time of the transfer. Under this Proposition, the new owner’s taxes are determined based on the prior established Proposition 13 factored base year value, rather than the current market value at the time of property acquisition.

Key Features of Proposition 58:

• Parent-child transfers: Proposition 58 allowed transfers of real property between parents and their children without reassessment for property tax purposes. The value of the transferred property is excluded from reassessment, which is particularly significant given the $1 million exclusion limit and the implications of market value assessments at the time of transfer.
• Principal residence: A parent’s principal residence could be transferred to a child without any limits on the excluded value.
• Other real property: Transfers of other types of real property (besides the principal residence) were also excluded from reassessment, but with a cap of $1 million in assessed value.
• No income tax consequences: These transfers did not trigger capital gains taxes, as they were excluded from reassessment for property tax purposes only.

Who Qualified for Proposition 58?

Eligible children under Proposition 58 included:

• Biological children
• Adopted children
• Stepchildren
• Children-in-law (including son-in-law and daughter-in-law)
• Grandchildren, if both parents (children of the property owner) were deceased.

It is essential to note that the exclusion also extended to legal entities such as trusts, where property transfers were not subjected to reassessment for property tax purposes, provided the ownership interests remained within the family. Additionally, the law does not mandate that the parent or child use the transferred property as his or her principal residence.

Eligibility and Requirements

To qualify for the Proposition 58 exclusion, the transfer of real property must adhere to specific criteria. The property transfer must occur between parents and children or grandparents and grandchildren. Additionally, the property in question must be the principal residence of either the transferor or the transferee. This ensures that the property is being used as a primary home, which is a key requirement for the exclusion.

The relationship between the transferor and transferee must also meet certain conditions. Eligible relationships include parents, children, grandparents, and grandchildren. This means that the property can be transferred from a parent to a child, or from a grandparent to a grandchild, without triggering a reassessment of property taxes.

Timing is another crucial factor. The transfer must have taken place on or after November 6, 1986. Furthermore, the claim for exclusion must be filed within three years of the transfer date or before the property is transferred to a third party, whichever comes first. Meeting these timing requirements is essential to benefit from the Proposition 58 exclusion.

Limits and Exceptions in Proposition 58

Although Proposition 58 provided an avenue to avoid property tax reassessment, certain limits applied:

• Principal residence exclusion: A parent’s principal residence could be transferred to a child without any limitation on value.
• Other real property transfers: For property other than the principal residence, the exclusion applied only to properties with a cumulative assessed value of $1 million.
• Market value exceeding the limit: If the real property exceeded the $1 million limit, the excess value would be subject to reassessment at the current market value.

Under Proposition 58, the new owner’s taxes are based on the established Proposition 13 factored base year value rather than the current market value, preventing dramatic increases in taxes after property acquisition.

Proposition 19

Effective February 16, 2021, Proposition 19 replaced Proposition 58, marking a significant shift in how property tax exclusions work in California. Proposition 19 limits the parent-child exclusion and introduces stricter guidelines for transferring real property.

Key Differences Between Proposition 58 and Proposition 19

Principal Residence Transfers

Under Proposition 58, parents could transfer their principal residence to their children without limitation on the home’s value, and the child would continue to pay the same property taxes. Under Proposition 19, however, only principal residences used as the child’s primary residence are eligible for an exclusion, and the exclusion is limited to the current assessed value plus $1 million of the home’s value.

If the current market value of the property exceeds this limit, the excess will be reassessed, resulting in property tax increases for the new homeowner. Additionally, school districts may be impacted by these changes as they rely on property tax revenues to fund various educational programs.

Other Property Transfers:

Proposition 58 allowed the transfer of up to $1 million in assessed value of other real property (beyond the principal residence) without reassessment. Proposition 19 eliminates this exclusion, meaning any property other than the principal residence will be reassessed to current market value upon transfer.

Eligibility Changes:

While Proposition 58 allowed the transfer of property to eligible children, stepchildren, and children-in-law, Proposition 19 has tightened restrictions. The property must be used as the principal residence of the child for them to benefit from the tax exclusion.

The Impact of Proposition 19 on California Real Estate

The transition from Proposition 58 to Proposition 19 has changed property transfers in California. While Proposition 58 provided more generous property tax benefits, Proposition 19 is designed to address revenue shortfalls and redirect funds to specific programs, such as wildfire prevention and funding for vulnerable communities. However, the changes under Proposition 19 have made it more challenging for families to retain real property under favorable tax conditions.

Proposition 19 also introduced significant changes beyond the limitations on parent-child transfer exclusions. It allows homeowners who are over 55, disabled, or affected by natural disasters to transfer their property tax basis up to three times to any county in California. This provides increased flexibility for those needing to relocate or downsize due to life changes, without facing a steep property tax increase. This additional benefit under Proposition 19 helps protect vulnerable homeowners while making the tax system more equitable across the state.

Parent-Child Transfer Exclusions and Property Tax Relief

Under Proposition 58, the parent-child exclusion allowed parents to transfer both their principal residence and up to $1 million of additional property to their children without a reassessment. This provided families with the ability to avoid property tax increases that would occur under a normal transfer. In contrast, Proposition 19 has limited this benefit, resulting in higher property taxes for many new property owners unless the property is used as a principal residence.

The factored base year value of the property under Proposition 58 would remain intact, ensuring that children did not face a dramatic increase in property taxes after acquiring the property. This protection is now limited under Proposition 19, leading many property owners to reassess their estate planning strategies.

Proposition 19 and Trust Administrations

In trust administrations where the date of death occurs on or before February 15, 2021, Proposition 58 still applies, allowing families to transfer property under the older, more favorable tax rules. For deaths occurring after this date, Proposition 19 rules take effect.

Property Tax Changes and Legal Implications Under the Revenue and Taxation Code

For those involved in real estate transactions or trust administrations, understanding how these propositions affect property tax purposes is crucial. California property owners now face stricter limits on their ability to transfer real property within the family without triggering reassessment.

In many cases, legal entities such as trusts play a crucial role in managing these property transfers. However, under Proposition 19, there is a greater chance of reassessment even if the property is transferred within a trust, particularly if the new owner does not meet the principal residence requirement.

Planning for Property Transfers Under Proposition 19

Given the complexities introduced by Proposition 19, property owners and investors need to plan carefully when it comes to transferring real property. Estate planning strategies that once relied on Proposition 58 for property tax relief may need to be revisited to avoid unintended tax consequences. In many cases, families may need to explore alternate means of transferring property or consider selling properties that no longer qualify for exclusion.

Key Considerations for Real Estate Investors

Real estate investors in California need to be mindful of how Proposition 19 affects the transfer of investment properties. While Proposition 58 allowed transfers of non-primary residences without reassessment (within certain limits), Proposition 19 does not provide any exclusions for such properties. This could result in significantly higher property taxes for investors when transferring property to children or other heirs.

Conclusion

Proposition 58 was a cornerstone of property tax relief for California families, allowing them to transfer real property between generations without facing steep tax increases. However, with the introduction of Proposition 19, these benefits have been scaled back, particularly affecting transfers of property that are not used as a principal residence by the new owner. For trust administrations with dates of death prior to February 15, 2021, Proposition 58 remains in effect, but for all others, Proposition 19 applies.

Understanding the changes brought by Proposition 19 requires careful planning and a clear comprehension of the property tax implications. At HCS Equity, we are committed to helping our clients handle these complex legal and financial situations, providing tailored solutions for real estate transactions and trust administrations.

If you need guidance on how Proposition 19 impacts your property transfers, contact us today to discuss your options.