Navigating Prop 19: Strategies for Property Owners to Benefit Parents and Grandparents and Their Heirs

California’s Proposition 19, which took effect in February 2021, brought significant changes to property tax rules, especially affecting parents and grandparents who own real estate. These updates have reshaped how families plan property transfers and manage tax burdens. Understanding the new rules and acting strategically can help families protect their assets and reduce unexpected tax costs.

This article explains how Prop 19 impacts property owners, what strategies parents and grandparents should consider, and when to take action to maximize benefits.

A typical family home in California with a garden, representing property ownership under Prop 19

How Prop 19 Changed Property Tax Rules for Families

Before Prop 19, parents and grandparents could transfer their primary residence to their children or grandchildren without reassessment of property taxes, regardless of the home’s value. This meant the new owners could keep the original, often lower, property tax base.

Prop 19 introduced two major changes:

• Limits on Parent-to-Child and Grandparent-to-Grandchild Transfers

Now, the property must continue to be the family home and the child or grandchild must use it as their primary residence. If the home’s market value exceeds the taxable value by more than $1 million, the difference is added to the tax base, increasing property taxes.

• Expanded Benefits for Homeowners Over 55

Homeowners over 55 can transfer their tax base to a new home anywhere in California, up to three times, regardless of location or price (with some limits). This helps seniors downsize or relocate without a big tax hit.

These changes mean families must rethink how and when to transfer property to avoid unexpected tax increases.

Key Strategies for Parents and Grandparents

1. Transfer Property While Parents or Grandparents Are Still Alive

Transferring property during the lifetime of the owner can help lock in the current tax base, especially if the home’s market value is close to or below the taxable value plus $1 million. Waiting until after death means the property will be reassessed at market value, often increasing taxes.

Example:

A parent owns a home with a taxable value of $400,000 but a market value of $1.5 million. If transferred now, the child can keep the lower tax base plus $1 million exemption, paying taxes on $400,000 + $1 million = $1.4 million. If transferred after death, the tax base resets to $1.5 million, increasing taxes.

2. Ensure the Home Remains the Primary Residence of the Child or Grandchild

To keep the tax benefits, the child or grandchild must live in the home as their primary residence. If they rent it out or leave it vacant, the property will be reassessed at market value.

Families should discuss living arrangements and plans clearly to avoid losing tax advantages.

3. Use the Over-55 Transfer Benefit to Downsize or Move

Parents or grandparents over 55 can sell their home and buy a new one anywhere in California, transferring their tax base up to three times. This is useful for seniors who want to move closer to family, reduce maintenance, or relocate for health reasons.

Example:

A grandparent sells a $700,000 home with a taxable value of $300,000 and buys a $900,000 home. They can transfer the $300,000 tax base to the new home, paying taxes on $300,000 plus the difference of $200,000 ($900,000 - $700,000), which is a much lower tax bill than reassessment at $900,000.

4. Consider a Trust or Estate Planning with Tax Professionals

Prop 19’s rules are complex, and mistakes can be costly. Working with estate planners or tax advisors can help families create trusts or other legal structures that protect property tax benefits and ensure smooth transfers.

Trusts can also help avoid probate and provide clear instructions for property use and transfer.

When Should Parents and Grandparents Take Action?

Timing is critical under Prop 19. Here are some guidelines:

• Before Selling or Transferring Property

Review the current taxable value and market value. If the home’s market value is significantly higher, transferring sooner can save taxes.

• Before Parents or Grandparents Turn 55

If they plan to move or downsize, acting before or shortly after turning 55 allows use of the tax base transfer benefit.

• Before Death

Transferring property during life can preserve tax benefits. Waiting until after death often triggers reassessment.

• When Family Circumstances Change

If children or grandchildren plan to live in the home, or if family members move out, reassess plans to maintain tax advantages.

Practical Examples of Prop 19 Impact

• Example 1: Parent Transfers Home to Child Who Moves In

A parent transfers a $1.2 million home with a taxable value of $600,000 to their child. The child moves in and claims it as their primary residence. The child’s property tax is based on $600,000 plus $1 million exemption, so $600,000 taxable value remains, no increase.

• Example 2: Child Does Not Live in Home

If the child rents the home instead, the property is reassessed at $1.2 million, increasing taxes significantly.

• Example 3: Grandparent Uses Over-55 Transfer

A grandparent sells a $500,000 home with a taxable value of $200,000 and buys a $700,000 home. They transfer the $200,000 tax base and pay taxes on the $200,000 plus $200,000 difference, saving thousands annually.

Final Thoughts on Navigating Prop 19

Prop 19 changes how families transfer property and manage taxes. Parents and grandparents must understand the new rules and plan carefully to protect their assets and minimize tax increases.

Taking action early, ensuring the home remains a primary residence, and using the over-55 transfer benefit are key strategies. Consulting with tax and estate professionals can provide tailored advice and avoid costly mistakes.

Families that plan ahead will find Prop 19 manageable and can continue to pass on homes with favorable tax treatment.

The Castro Law Team of experienced attorneys can help you and your family with expert counsel and legal advice in important decisions that need to be considered. If you already have an Estate Plan our team can review it to ensure you are in the best possible position concerning Prop 19 and it's potential impacts to you and your loved ones. Contact us at 888-560-2743 or click here to schedule your initial complimentary consultation.