By: Robert Spiegel
January 20, 2021
Known as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act of 2020, and passed by California voters last November, Proposition 19 affects taxes on homes and inherited property—and poses significant challenges for family farmers and ranchers.
As state agencies implement the new measure, the California Farm Bureau has been the only agricultural organization challenging interpretations and guidance the agencies have been using.
So far, Proposition 19 implementation is clear as mud, and property owners urgently need clarification from the state Board of Equalization. New guidance will be provided to county assessors and we expect legislative efforts will occur in 2021. In addition, Proposition 19 will likely face multiple legal challenges from California property owners.
So, what are the most pressing components of the measure that family farmers and ranchers should know?
Prior to the passage of Proposition 19, parents or grandparents could transfer their primary residence and $1 million per parent of other real property to their children without triggering a reassessment of those properties. After Feb. 15, Proposition 19 significantly narrows that exclusion.
Beginning Feb. 16, a transfer of a personal residence or family farm to a child is only exempt if the residence becomes the primary home of the child, or the family farm continues to be used for agricultural purposes.
However, even the transfer of a family farm or personal residence is limited, and may still face a partial property tax reassessment. The exclusion only applies as far as a certain, specified value—a new formula included within Proposition 19. Should a property exceed that specified value, anything above that would be assessed at fair market value—leading to a higher property tax bill.
Proposition 19 provides that if the fair market value of a family home or family farm is less than the sum of the factored base year value plus $1 million, the new factored base year value would not be adjusted. In that case, a child could assume the family home or family farm with the property taxes paid by their parents.
However, if the fair market value is equal to or more than the sum of the factored base year value plus $1 million, an amount equal to the fair market value of the family home or family farm—minus the sum of the factored base year value plus $1 million—is added to the original base year value of the transferred property.
Make sense? Thought not.
Let's try an example:
A farm has been held by a family for several years and has a factored base-year value of $425,738. The last surviving parent passes away, and the property is inherited by the only child. The child intends to continue the operation of the family farm and, at the time of the parent's death, it has a fair market value of $1,750,000. To determine the value under Proposition 19:
Calculate the sum of the factored base-year value plus $1 million: $425,738 + $1,000,000 = $1,425,738.
Determine whether the fair market value exceeds the sum of the factored base-year value plus $1 million: $1,750,000 is greater than $1,425,738.
Calculate the difference: $1,750,000 - $1,425,738 = $324,262.
Add the difference to the factored base-year value: $425,738 + $324,262 = $750,000.
That leaves a new combined base-year value of $750,000.
Farm Bureau members should be aware that if the family farm were treated as all other real property under Proposition 19, the taxes paid would be based on the actual fair market value of the farm, or $1,750,000, as compared to the new combined base-year value of $750,000 based on the example provided. That would equate to $17,500 in new property taxes paid by the child upon transfer, instead of $7,500.
Many questions remain related to Proposition 19. Farm Bureau members looking to pass their farm or personal residence should seek advice immediately from those familiar with estate and intergenerational transfers.
The Board of Equalization has said the filing of a notice of transfer is not acceptable for utilizing the earlier transfer benefits, and that the transfer itself must take place before Feb. 15—or anything after will be calculated based on Proposition 19.
There are many nuances that make this challenging. Farm Bureau continues discussions to soften any known impacts this may have on family farmers and ranchers.
(Robert Spiegel is a policy advocate for the California Farm Bureau. He may be contacted at firstname.lastname@example.org.)
Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.