Prop 19 Passes

Not entirely but if often doubles the tax exemption. Assuming one parent dies before the other there’s then an “A” trust and a “B” trust and they are treated as separate entities. There can be downsides. The cost basis of assets placed in the “B” trust is as of the date of death of the first parent who dies so there is more taxable appreciation when if and when those assets are ultimately sold.

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This article goes into some details on the trust question. There is indeed some trust maneuvers you can do to sidestep the limitation. You need a trust attorney to set it up before the deadline.

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More details written by a lawyer. Did not know the lifetime allowance for gift tax credit is scheduled to be halved in 2025, and that a gift to your kid will transfer your cost basis:

Any transfers after February 15, 2021 will be subject to the rules of Proposition 19. There are very serious downsides to making real property gifts. First, you would have to file a gift tax return using part of your $11,580,000 lifetime gift and estate tax credit to avoid paying taxes on this gift. This may be a very good use of the $11,580,000 credit, which is set to drop by 50% in 2025, if not lowered sooner by the new administration.

The second major consideration is cost basis. When you gift property, the recipient keeps your lower cost basis. When you die, your heirs get a stepped-up basis, which would allow them to sell real property with no capital gains tax, or depreciate income property as it if just purchased. This is a huge tax benefit that must be considered when making gifts.

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@manch do you know how the cost basis would work at a later date if the current owner is a trust?

No, I don’t…

Transferring Your Property Tax Basis - Effective April 1, 2021

For some homeowners, the ability to transfer their tax basis up to three times means it’s time to move. Previously homeowners could only transfer their tax base once in their lifetime and only within the same or a very limited number of counties within the state. Now homeowners aged 55 and over can move and transfer their current property tax assessment to a new primary home anywhere in California. For some, the desire to downsize, move closer to family or even finally purchase their dream home, can become a reality. The law also applies to the disabled and victims of natural disasters, like the California wildfires.

Prior to Prop 19, homeowners were also limited to the purchase of a new primary home that cost the same or less than the one they’re selling. Now homeowners can purchase a property up to $1M more than their existing home in order to claim the full benefit; after $1M, the transferred tax basis will be prorated.

For example, let’s say your current home has a “base year value” of $500,000 (this number can be found on your property tax bill), and it sells for $900,000. You find and purchase your dream home (in California) for $1,200,000. Your new home would have a tax base year value of $800,000.

  • Original property has a base year value of $500,000 and sells for $900,000
  • Replacement dwelling is purchased for $1,200,000
  • The replacement dwelling’s new base year value is $800,000
    • $1,200,000 - $900,000 = $300,000
    • Property’s “base year value” (from property tax bills) = $500,000
    • $300,000 + $500,000 = $800,000

Prop 19 allows you to transfer the tax base up to three times, however, the replacement property must be purchased within two years of the sale of the original property.

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Inherited Properties Have New Restrictions - Effective February 16, 2021

With Prop 19 now in effect beneficiaries could see a substantial increase in their property taxes for inherited property on or after February 16th. Where previously there was no limit to exclusion, Prop 19’s exclusions apply only to the first $1M of value.

For example, if a family home has a base year value of $300,000 and a fair market value of $1,500,000 at the time of transfer to the beneficiary, the adjusted base year value is $500,000.

  • Excluded under Prop 19 is the $300,000 plus $1,000,000
  • The replacement dwelling’s new base year value is $500,000
    • $300,000 + $1,000,000 = $1,300,000
    • $1,500,000 - $1,300,000 = $200,000
    • $200,000 + $300,000 = $500,000

Beneficiaries must also now live in an inherited property as their primary residence in order to get the tax break. They have just one year to establish the property as their principal residence and must live in the home continuously in order to avoid reassessment. (However, if the inherited property value is more than $1M over the original tax basis, a reassessment is still likely.)

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Reviving this old thread. I just heard from friend about proposal to repeal “death tax” part of the Prop 19.

I see protest of prop 13/19 on sunset 19th ave today