Prop 19 and Your Inheritance: What Changed for California Families

Proposition 19, passed by California voters in November 2020, significantly changed how property taxes work when property is transferred between parents and children. Before Prop 19, children could inherit their parents' low property tax base. Now, that benefit is severely limited—and many families are paying thousands more in property taxes every year.

What Changed with Prop 19

Before Prop 19 (The Old Rules)

Under the old system:

• Children could inherit a parent's primary residence AND keep the parent's low property tax base
• Children could also inherit up to $1 million in other real property (assessed value) with the same benefit
• It didn't matter if the child lived in the inherited property or rented it out
• The low property tax base was preserved indefinitely

Example: Parents bought a home in 1985 for $150,000. It's now worth $1.2 million but is still taxed based on roughly $200,000 (the original value plus allowed increases). Under the old rules, children inherited and kept that low tax base, paying about $2,500/year in property taxes instead of $15,000+.

After Prop 19 (Current Rules)

Starting February 16, 2021:

• The parent-to-child exclusion only applies to a primary residence
• The child must use it as their own primary residence within one year
• The exclusion is limited to the home's current assessed value plus $1 million
• If the home is worth more than $1 million above the assessed value, the difference is reassessed
• Investment properties and vacation homes get no exclusion at all

Example using the same home: If children inherit that $1.2 million home but don't live in it (or can't afford to within a year), the property is reassessed to $1.2 million. Property taxes jump from $2,500/year to about $15,000/year—a $12,500 annual increase.

How This Affects Estate Planning

Impact 1: Investment Properties Are Fully Taxed

If you own rental properties that you plan to leave to your children, they will be reassessed to current market value upon your death. There is no parent-child exclusion for investment properties.

Planning consideration: Some families are:

• Selling investment properties before death and leaving cash instead
• Converting to LLCs for potential liability protection (doesn't help with taxes)
• Accepting the higher taxes as the cost of keeping the property in the family

Impact 2: Children Must Live in the Home

The exclusion for a primary residence only applies if the child uses it as their own primary residence within one year of transfer.

Planning consideration:

• If multiple children inherit, can one child buy out the others and live there?
• Is keeping the home realistic if the child already has their own home?
• What's the plan if no child wants to (or can) live in the property?

Impact 3: The $1 Million Cap Creates Partial Reassessments

Even if a child lives in the home, if the market value exceeds the assessed value by more than $1 million, the excess is reassessed.

Example:

• Mom's home: Current assessed value $300,000, market value $2 million
• Gap: $1.7 million
• Amount protected: $1 million
• Amount reassessed: $700,000 (the excess over $1 million)
• Child's new assessed value: $1 million (instead of $300,000 or $2 million)

This is better than full reassessment but still a significant tax increase.

Impact 4: Grandchildren Get No Exclusion

The parent-child exclusion doesn't extend to grandchildren unless both parents in the middle generation have died. Grandparents leaving property to grandchildren will trigger full reassessment.

Strategies to Consider

Strategy 1: Lifetime Transfer

Transferring property before death can sometimes preserve benefits, but this is complex:

• Pre-Prop 19 transfers may have preserved the old rules
• Post-Prop 19 transfers between living parents and children also have the new limitations
• Gifts of appreciated property can have capital gains implications

Warning: Don't transfer property without understanding all the tax implications. Gift tax, income tax, and property tax rules all interact.

Strategy 2: Structure for Child Occupancy

If a child can live in the inherited home:

• Make sure the estate plan clearly identifies one child as the recipient
• Plan for how other children will be compensated (life insurance, other assets)
• Understand the one-year deadline and help the child prepare

Strategy 3: Accept Higher Taxes

For some families, the higher property taxes are acceptable:

• The property still provides income (for rentals)
• The property has appreciated significantly
• Emotional attachment to the property outweighs the cost
• The family can afford the higher taxes

Strategy 4: Sell and Distribute Cash

Some families choose to:

• Sell the property at current market value
• Distribute cash to beneficiaries
• Let beneficiaries decide how to use the funds

This avoids the ongoing tax burden and distributes wealth equally.

What This Means for Your Trust

Your revocable living trust should address:

1. Clear direction on property distribution - Who gets real property? Is one child designated as the primary residence recipient?
2. Instructions for the one-year deadline - Help your successor trustee understand the timeline.
3. Flexibility for changing circumstances - Market conditions and family situations change.
4. Coordination with other assets - How are children who don't receive real property compensated?

Common Questions About Prop 19

Can I add my child to the title now to avoid reassessment?

Adding a child to title is a partial transfer and triggers proportional reassessment. It doesn't avoid Prop 19 and can create other problems.

What if my child can't afford to live in the home?

If your child can't use the property as their primary residence within one year, the property will be reassessed. Consider whether keeping the property makes financial sense.

Does a trust help with Prop 19?

A revocable living trust is treated the same as direct ownership for Prop 19 purposes. The trust doesn't provide any property tax benefit, but it still avoids probate.

What about irrevocable trusts?

Some irrevocable trusts may be treated differently, but the rules are complex. Consult with both an estate planning attorney and a tax professional.

At Bordeaux Legacy Law, we help California families navigate post-Prop 19 estate planning. Every family's situation is different, and the right strategy depends on your specific properties, beneficiaries, and goals.