Proposition 191, The Home Protection for Seniors, Severely Disabled, Families, and Victims of  Wildfire or Natural Disaster Act (hereinafter referred to as the “Act”), was voted on and passed by  a majority of California voters on November 3, 2020. Although the Act has garnered enough votes  to pass, it will not take effect until February 16, 2021.  

As a result of the passage of the Act, several new restrictions have been placed on real property  transfers between Parents & Children and transfers between Grandparents & Grandchildren (where  both parents of the grandchild have predeceased). The Act further set forth new guidelines and  restrictions for transferring a primary residence’s property tax basis to any county (all county  reciprocity) in California; additionally, the owners of a primary residence which was destroyed as  a result of a natural disaster, have the ability to retain their existing property tax basis after  obtaining a replacement property.  

What are the new limitations on real property transfers (including inheritance) between Parents  & Children and Grandparents & Grandchildren (where both parents of the grandchild have  predeceased) 

Prior to February 16, 2021:  

There are no restrictions pertaining to a qualifying transfer involving the transferor’s (person  giving away the property) primary residence; however, this does not prevent annual county  reassessment adjustments. Any transfer of a non-primary residence(s) qualifies for exclusion from  reassessment as long as the property tax assessed value of all other properties being transferred is  less than one million dollars (<$1,000,000.00) in aggregate. Any valuation which exceeds one  million dollars (>$1,000,000.00), in aggregate will reassessed to current market value 1,2. For  example:  

 For all examples herein: Mary is the Mother, Steve is Mary’s son and parent to George,  George is Mary’s grandson and the son of Steve, and the property’s fair market value is  $1,250,000.00:  

(1) If Mary transfers her primary residence (Transferor) to Steve (Transferee) through her trust  after she passes away (inheritance via devise), the property taxes for the property will not  be reassessed regardless of the value of the property.  

(2) If Mary transfers her primary residence (Transferor) to George (Transferee) through her  trust after she passes away (inheritance via devise) and Steve is still alive, all of the property  taxes for the property will be reassessed regardless of the value of the property because  Steve (parent to George) is still living. This is deemed a non-qualifying transfer  

(3) If Mary has 5 additional properties other than her primary residence, each with a value  property tax assessed value of $250,000.00, four of the properties will qualify for the  parent-child exclusion from reassessment, ($1,000.000.00 in aggregate) however the 5th property will be reassessed to current market value for property tax purposes. 

1. (Assem. Const. Amend. No. 11, Stats. 2020 (2019-2020 Reg. Sess.) res. ch. 31.), (Cal. Const., art. XIII A §§ 2.1-2.3, approved by voters, Gen. Elec.  (Nov. 3, 2020), commonly known as Prop. 19.)  
2. 1(Cal. Const., art. XIII A, § 2.1(c)(1))  

(4) If Mary transfers her primary residence (Transferor) to Steve (Transferee) as a gift while  she is still alive (inter vivos transfer) and Steve lives at the residence, the property taxes  for the property will not be reassessed regardless of the value of the property; however,  Mary will need to pay a federal gift tax or she will need to have her taxable estate  reduced as a result of giving the property to her son during her life.  

Any transfers which occur during the Transferor’s lifetime are subject to IRS gift tax. Currently,  the IRS gift tax exception amount is $15,000.00/per person/calendar year; therefore, a married  couple can make a combined gift to a single person in the amount of $30,000.00 without having  to pay any sort of gift tax. Please note, gift tax does not apply to transfers which involve:  

(1) Gifts that are not more than the annual exclusion for the calendar year;  (2) Tuition or medical expenses you pay for someone (the educational and medical  exclusions)  

(3) Gifts made to your spouse (interspousal transfers)  

(4) Gifts to a political organization for its use.  

If you intend on making a gift transfer (inter vivos gift) which exceeds the IRS gift tax exception  amount3, we advise that prior to the transfer you consult with a tax attorney, CPA or other tax  professional as you will need to report the transfer to the federal government.  

February 16, 2021 going forward: 

The Act provides that exclusions from reassessment derived from transfers between Parents &  Children and Grandparents & Grandchildren (where the parents of the grandchild have  predeceased) are now limited to ONLY the transfer of the primary residence and the Transferee  MUST declare the property as his/her primary residence4; however, this does not prevent annual  county reassessment adjustments. Additionally, if the fair market value of the property, at the time  of transfer, is equal to or greater than the assessed value (denoted on your property tax bills) plus  one million dollars (this amount is to be adjusted annually beginning on February 16, 2023), the  amount which exceeds that valuation will be reassessed and tacked onto the existing property tax  basis5. For example: 

For all examples herein: Mary is the Mother, Steve is Mary’s son and parent to George, George is  Mary’s grandson and the son of Steve, and the property’s fair market value is $1,250,000.00:  

(1) If Mary transfers her primary residence (Transferor) to Steve (Transferee) through her trust  after she passes away (inheritance via devise) and Steve lives at the residence and the  property’s assessed value is $300,000.00, the property taxes will not be reassessed as a  result of this transfer. Since the property’s assessed value ($300,000.00) plus the one  million dollar amount ($1, 000,000.00; $1,300,000.00 total valuation) exceeds the fair  market value of $1,250,000.00, the property will not be reassessed. 

(2) If Mary transfers her primary residence (Transferor) to Steve (Transferee) through her trust  after she passes away (inheritance via devise) and Steve lives at the residence and the  property’s assessed value is $100,000.00, the property taxes will be reassessed as a result

3. (26 U.S.C. §§ 2001 et seq., 2503 et seq.)  
4. 1(Cal. Const., art. XIII A, § 2.1(c)(1))  
5. 1(Cal. Const., art. XIII A, §§ 2.1(c)(1)(A) – 2.1(c)(1)(B)(ii))  

of this transfer for the value which exceeds the valuation. Since the property’s assessed  value ($100,000.00) plus the one million dollar amount ($1, 000,000.00; $1,100,000.00  total valuation) is less than the fair market value of $1,250,000.00, the property’s tax  basis will be reassessed for $150,000.00 which exceeds the valuation. Said reassessment  will be tacked onto the existing property tax basis.  

(3) If Mary transfers her primary residence (Transferor) to Steve (Transferee) through her trust  after she passes away (inheritance via devise) and Steve lives elsewhere and has no  intention of living in the property, the entire property will be reassessed as a result of this  transfer. Since the property will not be a primary residence for Steve, the entire property  undergoes a reassessment upon transfer.  

(4) If Mary transfers her rental property, which is a non-primary residence, (Transferor) to  Steve (Transferee) through her trust after she passes away (inheritance via devise) and  Steve (Transferee) lives at the residence currently, the entire property will be reassessed as  a result of this transfer. The Act ONLY PERMITS the exclusion from reassessment for the  transfer of the transferor’s primary residence.  

(5) If Mary transfers her primary residence (Transferor) to Steve (Transferee) as a gift while  she is still alive (inter vivos gift) and Steve lives at the residence and the property’s  assessed value is $300,000.00, the property taxes will not be reassessed as a result of this  transfer. Since the property’s assessed value ($300,000.00) plus the one million dollar  amount ($1,000,000.00; $1,300,000.00 total valuation) exceeds the fair market value of  $1,250,000.00, the property will not be reassessed. However, Mary will need to pay a  federal gift tax or she will need to have her taxable estate reduced as a result of giving  the property to her son during her life.  

Any transfers which occur during the Transferor’s lifetime are subject to IRS gift tax6. Currently,  the IRS gift tax exception amount is $15,000.00/per person/calendar year; therefore, a married  couple can make a combined gift to a single person in the amount of $30,000.00 without having  to pay any sort of gift tax7. Please note, gift tax does not apply to transfers which involve:  

(1) Gifts that are not more than the annual exclusion for the calendar year;  (2) Tuition or medical expenses you pay for someone (the educational and medical  exclusions)  

(3) Gifts made to your spouse (interspousal transfers)  

(4) Gifts to a political organization for its use. 

If you intend on making a gift transfer (inter vivos gift) which exceeds the IRS gift tax exception  amount8, we advise that prior to the transfer you consult with a tax attorney, CPA or other tax  professional as you will need to report the transfer to the federal government. 

6. (26 U.S.C. §§ 2501 et seq.)  
7. (26 U.S.C. §§ 2001(a)-(c), 2010(c), 2013, 2503, 2522-2524)  

What are the pros and cons of gifting my property to my children?  

A transfer of real property to an individual during a person’s lifetime will be subject to the federal gift tax. Currently, the Federal Gift Tax Exclusion amount permits for transfers of fifteen thousand  dollars ($15,000.00) per year per individual9. However, with consultation of a Tax attorney, CPA,  accountant or other tax professional, it should be noted that gifts which exceed the Federal Gift  Tax Exclusion can be deducted from an individual’s Unified Credit (amount an individual can  transfer to heirs upon death with no federal estate tax liability). The current Unified Credit amount 

is $11.58 million dollars per individual or $23.16 million for a couple10.  

For instance, if an individual made a one-time gift transfer valued at $595,000.00 to a third party,  the Donor’s (person providing the gift) Unified Credit amount would be reduced to $11 million  dollars; here’s the math:  

$11,580,000.00 (Unified Credit) + $15,000.00 (annual Federal Gift Tax Exclusion) – $595,000.00  (one-time gift) = $11 million (remaining Unified Credit amount)  

PRIOR TO the February 16, 2021:  

Pros: Subject to the exceptions denoted above, the property’s tax basis may remain the same for  any property transfers between qualifying recipients. Depending on the date of the transfer, as  denoted above, it is possible for a transferor to transfer all of his/her/their property to qualifying child/grandchild (transferee) and said transferee may be able to retain the same property tax basis  as the transferor for all properties.  

Cons: Transferring Real Property to a third party (or child) relinquishes all control of that property;  thus, making the property susceptible to current and future creditors of the new property owner.  Additionally, the property would not receive the benefit of a step up in basis in regards to  calculating capital gains. Capital gains become due upon the sale of a capital asset (such as real  property/vacant land) to a third party. An inter vivos transfer would force the capital gains to be  calculated from the date of the property’s original acquisition to the date of sale to a third party.  

February 16, 2021 going forward 

Pros: Subject to the exceptions denoted above, the property’s tax basis may remain the same for  ONLY PRIMARY RESIDENCE transfers between qualifying recipients. Depending on the date  of the transfer, as denoted above, it is possible for a transferor to transfer his/her/their primary  residence to qualifying child/grandchild (transferee) and said transferee may be able to retain the  same property tax basis as the transferor subject to the restrictions aforementioned. 

Cons: Transferring Real Property to a third party (or child) relinquishes all control of that property;  thus, making the property susceptible to current and future creditors of the new property owner. .  Additionally, the property would not receive the benefit of a step up in basis in regards to  calculating capital gains. Capital gains become due upon the sale of a capital asset (such as real  property/vacant land) to a third party. An inter vivos transfer would force the capital gains to be  calculated from the date of the properties original acquisition to the date of sale to a third party. 

8. (26 U.S.C. §§ 2010(c), 2013, 2503, 2522-2524)  9., 10. (26 U.S.C. §§ 2001(a)-(c), 2010(c), 2013, 2503, 2522-2524)  

For all examples herein: Mary is the Mother, Steve is Mary’s son, the property was purchased for  $250,000.00 and the property’s current fair market value is $1,250,000.00:  

(1) If Mary transfers her primary residence (Transferor) to Steve (Transferee) as a gift while she is still alive (inter vivos gift) and Steve subsequently decides to sell the property to a  friend (third party), the capital gains for the property are to be calculated based on the  difference from the fair market value at the time of original acquisition ($250,000.00) to  the date of sale ($1,250,000.00) to a third party. Therefore, Steve would be paying a tax  in a percentage of the gain amount ($1,000,000.00) less any deductibles, if applicable.  

What are the pros and cons of transferring my property to my children after I die using my trust?  

Pros: A step-up in basis dictates the capital gain amount at the current fair market value of a  property at the time of death of the real property owner. If a property is owned by a joint trust  (two spouses), a full step-up in basis occurs twice on the property (once at the death of each  spouse). Therefore, the capital gains amount is calculated from the date of death, rather than its  original acquisition, to the date of sale. Thus, a spouse who may need additional funds after the  passing of their loved one, can sell a trust property and pay less in capital gains taxes.  

For all examples herein: Mary is the Mother, Steve is Mary’s son, the property was purchased for  $250,000.00 and the property’s current fair market value is $1,250,000.00:  

(1) If Mary transfers her primary residence (Transferor) to Steve (Transferee) through her trust  after she passes away (inheritance via devise) and Steve subsequently decides to sell the  property to a friend (third party) a month after Mary’s passing, the capital gains for the  property are to be calculated based on the difference from the fair market value at the time  of Mary’s death ($1,250,000.00) to the date of sale ($1,250,000.00 plus any increase in  value that may have occurred subsequent to Mary’s death) to a third party. Therefore,  Steve would be paying a tax in a percentage of the gain amount (the difference between  $1,250,000.00 plus any increase in value that may have occurred subsequent to Mary’s  death) less any deductibles, if applicable. Thus, he would be paying arguably the smallest  amount of capital gains tax under this scenario. 

Cons: The Transferee/beneficiary may not be able to receive the same property tax basis of the  property(ies); depending on the date of transfer and whether the property being transferred is a  primary residence.  

Does Proposition 19 effect transfers between persons who are not parents/children or  grandparents/grandchildren (where the parents of the grandchild have predeceased)?  

The exclusion from reassessment of property taxes only applies to the following transfers  (exceptions denoted above):  

(1) Transfers between spouses (interspousal transfer)  

(2) Transfers between parents and children (subject to the exceptions above) 

(3) Transfers between grandparents and grandchildren where both parents of the grandchild  have predeceased (subject to the exceptions above). 

Any transfer, including transfers between siblings, which is not denoted above, will result in a full  reassessment of the property’s tax basis11. This reassessment restriction is currently law and will  not be changed with the passing of the Act.  

Under the Act, can I move to another county in California and retain my same property tax basis?  What if I am a victim of a natural disaster or wildfire?  

According to the Act, beginning on April 1, 2021, any individual and who is an owner of a primary  residence, has the ability to transfer the benefit of their current property tax basis to any county in  California as long as the following conditions are met:  

(1) The owner is over 55 years of age or any severely and permanently disabled person or any  person who is a victim of wildfire or other natural disaster;  

(2) Must acquire new residence within two (2) years of the sale/destruction of the original  primary residence;  

(3) The transfer of the property tax basis has not occurred more than three (3) times (this  limitation is only for persons who qualify based solely off of their age of 55+)12.  (4) Valuation of the primary residence does not exceed the current fair market price of the  newly acquired property. If the value of the original property exceeds that of the newly  acquired one, the tax basis will remain the same. If the value of the original property is  LESS than the newly acquired property, the difference will be assessed and tacked onto  the existing property tax bill.  

13Does Prop 19 also apply to the family farm?  

Yes it does; a family farm is treated as if it were a primary residence for purposes of the Act.  Should I worry more about Capital Gains or maintaining the Property Tax basis for my children? 

Unfortunately, there is no clear answer relating to this question. However, here are a few  considerations to think about (please note this is not an exhaustive list):  

1) Whether your transferees/beneficiaries intend on retaining or selling the property(ies);  2) Whether you are willing and able to relinquish full control of an asset without needing it  back at a later date; 

11. 1(Cal. Const., art. XIII A, § 2.1(a)(2))  12. 1(Cal. Const., art. XIII A, § 2.1(b)(3))  13. 1(Cal. Const., art. XIII A, § 2.1(b)(2)(B))  

3) Whether you are able to reduce your taxable estate or pay the gift tax for the transfer (please  note, taxable estate values fluctuate from time to time);  

4) Some transfers may not be permissible if they are made in anticipation of qualifying for a  government assistance program;  

5) Whether the transferees’ creditors will attach to the property forcing its sale  6) Whether changing your primary residence to the residence which your children intend on  retraining as their family home is more advantageous to do or not; whether the owners are  comfortable moving to another property. 

7) IRS Gift Tax  

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on gift-taxes 

(1) Prop 19:  

• (Assem. Const. Amend. No. 11, Stats. 2020 (2019-2020 Reg. Sess.) res. ch. 31.), *parallel  citation* (Cal. Const., art. XIII A §§ 2.1-2.3, added by initiative, Gen. Elec. (Nov. 3, 2020),  commonly known as Prop. 19.) **must be in footnote because prov. recently  added/amended**  

(2) (Cal. Const., art. XIII A, § 2.1(c)(1))  

(3) IRS Gift Exceptions Transfers  

• (26 U.S.C. § 2503)  

(4) (Cal. Const., art. XIII A, § 2.1(c)(1))  

(5) (Cal. Const., art. XIII A, § 2.1(c)(1))  

(6) (26 U.S.C. §§ 2501 et seq.)  

(7) (26 U.S.C. §§ 2001(a)-(c), 2010(c), 2013, 2503, 2522-2524)  

(8) (26 U.S.C. §§ 2010(c), 2013, 2503, 2522-2524)  

(9) (26 U.S.C. §§ 2001(a)-(c), 2010(c), 2013, 2503, 2522-2524)  

(10) (26 U.S.C. § 2010(c))  

(11) (Cal. Const., art. XIII A, § 2.1(a)(2))  

(12) (Cal. Const., art. XIII A, § 2.1(b)(3))  

(13) (Cal. Const., art. XIII A, § 2.1(b)(2)(B))