California property tax and Proposition 19

Previously, a transfer of ownership in California real property generally resulted in a reassessment for property tax purposes, which meant an increase in real property taxes. There were, however, two exclusions from reassessment that could apply for transfers between parents and children:

1. Principal Residence Exclusion - The principal residence exclusion permitted the transfer of a principal residence of unlimited value between parents and children without being subject to reassessment.

2. $1 Million Lifetime Non-Principal Residence Exclusion - This exclusion permitted the transfer between parents and children of up to $1 million of assessed value of all other types of property (e.g., second homes, rental properties, commercial properties) without triggering a reassessment. The $1 million exclusion was based on the assessed value, which can often be lower than the current fair market value, thereby allowing the transfer of a higher percentage of the property without reassessment. For a married couple, this was a combined $2 million lifetime exclusion.

Proposition 19 went into effect on February 16, 2021 and caused the following changes to the exclusions discussed above. 

1. In order to qualify for the principal residence exclusion, the child receiving the property would have to use the residence as the child’s own principal residence and the exclusion amount would be limited to the first $1 million of assessed value instead of being unlimited.

2. The $1 million non-principal residence exclusion would be eliminated entirely.