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illustration of a house and check bookBy allowing homeowners to keep their property taxes relatively low, California’s property inheritance laws, specifically Proposition 13 and Proposition 58, are likely contributing to the drop in inventory of homes for sale across the state, causing the state to lose up to $1.5 billion in property taxes every year.

This is according to the California Association of Realtors. In an attempt to solve these problems, the California Association of Realtors is currently working on an initiative for the November 2020 election that could potentially scale back the aforementioned inherited property tax laws, and at the same time, pay for a portion of another property tax break the association is pushing for in this year’s ballot.

Inherited Property Tax Break — Propositions 13, 58 and 193

Thanks to Proposition 13, or the parent-child tax break, real property in the state of California is typically reassessed at market value only when it is transferred or sold. What’s more, the assessed value can appreciate by no more than two percent year-over-year, including the value of improvements. At this point, it is worth noting that the average property tax in California is roughly 1.2% of the assessed value. However, this tax tends to soar significantly when long-held properties change hands. In addition to Proposition 13, the state of California passed Proposition 58 in 1986, excluding certain types of property transfers from reassessment. In particular, such transfers include transfers between spouses, as well as the transfers – by inheritance, sale, or gifts — between parents and children of a main residence and a maximum of $1 million in assessed value for other assets, such as a vacation home or rental units. It is worth noting that the parent does not necessarily have to be dead for his or her children to claim this tax break. Remember, the inherited property tax break also applies to real property transfers from children to their parents, and an unlimited number of generations can use it, meaning it is a perpetual tax break. In 1996, California passed Proposition 193, allowing grandparents to transfer real property to their grandchildren without necessarily triggering a reassessment. However, this is only possible if the grandchildren in question are orphans.

New Initiative – Proposition 5

Under Propositions 58 and 193, county assessors in the state of California exempted around 62,000 homes from reassessment between 2016 and 2017, which was seven times the number of homes exempted under Propositions 60, 90 and 110. Under these three Propositions, homeowners aged 55 and older or permanently disabled can sell their main residence and at the same time, transfer the tax assessment from their primary residence to another property either in the same county or one of the other 11 counties in California that accept incoming transfers. However, this is only possible if the cost of the new property is equal or less than the cost of the original property. What’s more, each homeowner can only do this type of transfer once. Such restrictions are partly responsible for the diminishing for-sale inventory across California, says the California Association of Realtors. Because of this, the association is pushing an initiative for the 2018 ballot. Known as Proposition 5, this initiative would remove all the aforementioned restrictions, increasing the inventory of homes for sale. At the same time, the association intends to submit another initiative to the attorney general for the November 2020 election. In general, the 2020 initiative would seek to offset the cost of capping the parent/child exemption on a primary residence, eliminating the exclusion if the child does not live in the properly, and abolish the exclusion to other properties.

The California Association of Realtors believes that the current inherited property tax incentives are hurting the California real property market and causing the state to lose more than $1.0 billion annually in property taxes. To deal with these problems, the association will submit initiatives to the attorney for the 2018 and 2020 elections.