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An election in California just wouldn’t be the same without the perennial batch of propositions.

With the potential to affect everything from your Uber driver1, to medical research and beyond, 2020’s ballot propositions dramatically changed how the state operates. Of particular note is Proposition 19, which passed with 51.1% of the vote. The changes outlined in Proposition 19 will take effect in two separate phases early in 2021 and offer both opportunities and drawbacks. To begin, we’ll look at the current law, the specifics of the new proposition and the timeline for implementation. From there, we’ll review how the new proposition may affect investors and offer some considerations for your strategy going forward.

How It Worked Before Prop 19

Let’s start with the basics. The prior law had two main features. First, it provided tax benefits for homeowners to downsize their home in retirement and second, it allowed certain heirs2 to inherit real property with some meaningful property tax benefits as well. Looking at the downsizing benefits, the old law allowed homeowners over the age of 55 to downsize their principal home and buy another of the same or very similar value while maintaining their prior Assessed Value. Generally, the base value is the value of the home when it was bought, as adjusted up by 2% each year thereafter. The law allowed this to happen once (unless you were subsequently disabled) and the transactions had to be done within the same county or between a small group of California counties who had agreed to allow it.

As to the inheritance piece, the old law also allowed for your child or grandchild to inherit property and retain the same base year, no matter how they used the property. This was allowed with no restriction on your principal residence and included up to $1 million per parent of factored base year value on any other real property (i.e. rentals, etc).

The Good – Downsizing is Easier

Under Proposition 19 things have changed quite a bit. For those looking to downsize and stay here in California, things got quite a bit easier with the new law. However, for those inheriting property, things got a bit worse.3 Let’s tackle each piece individually.

When fully implemented, the new law allows homeowners over the age of 55 to sell their home and move anywhere in California. The new home may be of any value and will still retain the Assessed Value from the prior home assuming the property was purchased within two years of the sale of the prior home. Further, if the new home is worth more than the old home the difference will get added on to the base year value. This portion of the law will go into effect on April 1, 2021. Let’s look at an example.

Assume John and Jane are moving from Orange County to Santa Clara County to be closer to their children. They are both over age 55 and are selling their home in Orange County that they bought many years ago. Let’s assume their Assessed Value has grown to $250,000 over the years and the sales price will be $2 million. Just like under the old law they can move to Santa Clara County and buy a home worth $2 million or less and have no change in their property taxes. But what if the home they want is priced at $2.5 million? In this case, the excess amount of $500,000 would be added to their prior base value, resulting in a property tax assessment on $750,000. What if John and Jane decide to move again? The new law allows them to transfer their base value up to 3 times—building in a lot of flexibility for them to find the right home.

The Bad – The Kids are Paying for All of This

The second major portion of Proposition 19 makes significant changes to how children and grandchildren inherit real property. Recall that under the prior law parents could transfer their primary home, along with as much as $2 million of factored base value real estate, to their children or grandchildren without triggering a property tax reassessment. Further, the children could use the properties as they saw fit. The new law restricts both the value of the benefit and the use of the property.

Let’s consider the impact of this new law on ou