In 1978 California voters approved Proposition 13 to rein in property taxes that had doubled in 10 years. The measure was the inspiration for an anti-tax movement that has taken hold of the public discourse in Washington and in state legislatures throughout the country. Prop 13 caps the county real estate property tax at 1 percent of its value when it last changed hands (i.e. change of ownership). Prior to Prop 13, real estate was taxed at its current market value. During real estate booms, the tax kept on rising along with the value. This situation had the effect of forcing many out of their homes because they could no longer afford the property tax. However, along with the cap on tax comes potential budget problems.
Business Week discusses in depth some of California’s budget problems arsing as the unintended consequences of Prop 13. One of the major impacts of Prop 13 has been on education. In addition to its effect on elementary schools, California had to cut support for public universities by 18 percent to $4.5 billion this year, according to the California finance department. California’s general- fund backed debt has risen to $82.6 billion from $2.25 billion in 1978, state figures show. California carries more debt than any other state and ranks eighth on a per-capita basis, with $2,542 for each resident, Moody’s Investors Service has said.
Prop 13 is heavily tied into estate planning. It protects real estate from reassessment (and thereby a higher property tax) when the property is passed between parent and child and, sometimes, between grandparent and grandchild. This protection can generate an enormous savings. Consider a parent who purchased a home in 1975 for $75,000 and whose home is now worth $575,000. If this home is passed to the child, it will typically retain the property tax “value” that the parent held. That is a difference of $500,000 Given that property tax is approximatley 1% of the tax value, then that equates to a savings of $5000 per year.
Avoiding probate is a desire of most people. But proper planning goes so much further than that. It requires a consideration of all of the different taxes involved as well as who gets what and how it will all work out efficiently. Take a look at my Frequently Asked Questions Page on Estate Planning for more on this topic.