The Other Prop 8…

For many Californians, their home is their biggest asset and, in many cases, tax issues related to the sale of the home drive their estate plan.  Strategies such as a QMap or QVap trust may help deal with the capital gains from sale.  Planning for a beneficiary who will qualify for the Parent-Child Exclusion will help preserve the Proposition 13 value of the home.  And speaking of property tax…

In 2008, California rejected Proposition 8, which banned gay marriage in the state and continues to rage in the courts.  However, 30 years earlier, there was another Proposition 8, which passed.  The frequently forgotten companion to Proposition 13 is beginning to cause headaches for many Californians.

Proposition 13 is the main, commonly known property tax law of the state.  The proposition was intended to provide stability to California homeowners by ensuring that property tax levels would not dramatically increase from one year to the next due to rapidly rising real estate values.  Instead, homeowners see increases of not more than 2% per year from the property’s base property value (either 1975-1976 value or, if later, the year in which the property changed ownership) until they sell the property or complete new construction.  As a result, even when the property value increases by more than 2% in a year, the property tax amount does not.  Upon sale or new construction, the property is reassessed at its value at that time and the 2% limit reapplies.

However, in the same year that Proposition 13 was passed, Proposition 8 was also passed.  In what was a long era of increasing property values, many Californians forgot about this other proposition.  However, Californians suddenly brought it to the forefront of their minds!  When people began to realize that their property values had decreased, they began appealing their property’s tax assessed value in order to lower their property tax bill.
But Californians forgot something else: what the tax man giveth, the tax man can taketh away.  The “base year” value of your property is still the Proposition 13 value.  This means, that if your base year value of your property is $200,000, this value is used to calculate the maximum 2% yearly increase to your property tax value.  If you successfully argued that your property value is $190,000, then you were probably delighted to save money on your property taxes.  However, the state of California has been pretending that you did not successfully make your argument and has been adding up to 2% per year on the $200,000 base.  In other words, the 2% limit no longer applies to your property tax bill!  If your property value has fully recovered, your old property tax bill will fully recover as well.

Considering the effects of property tax when completing your estate plan can save your heirs thousands per year in property tax, even if it can’t help your current year tax situation.  Be sure to consult a knowledgeable attorney regarding the Parent-Child exclusion, and the proper application of the grandparent-grandchild exclusion.

Estate Planning: The Price of Organization, Rewards, Gifts, and Wondrous Tax Things… FREE REPORT: This complimentary report, focused on Estate Planning, is comprised of many of Mr. Miller’s articles from his long running column for the largest regional newspaper in San Diego County. This report will guide you through the questions surrounding getting your estate planning in order.