Understanding Prop 19: What California Landlords Need to Know

Planning to pass down a rental property to your children or inherit one yourself? If so, California’s Proposition 19 (Prop 19) could have a significant impact on your property taxes. Passed in 2020, Prop 19 changes how inherited properties are taxed, which could lead to hefty tax bills for heirs—especially for rental properties.

Understanding these changes is essential for landlords and housing providers who want to protect their investments and pass them on to future generations without financial surprises.

If you’re looking for experienced Orange County property managers who can navigate property tax planning and protect your investment, give us a call at (949) 892-1505. We’ll help ensure you’re informed and prepared.

Key Takeaways

  • Passing down rental properties? California’s Prop 19 changes the rules for property tax reassessment when inherited by your kids. If they don’t move in, they’ll face a hefty property tax bill based on today’s market value.
  • The $1 million exclusion cap isn’t much in places like San Diego or Orange County. Even if your heirs live in the property, any value over that cap is reassessed at current rates.
  • If you’re a housing provider, Prop 19’s tax transfer benefits don’t apply to your rental properties.
  • There are tax planning strategies—like gradual ownership transfers through LLCs and trust planning—that can help minimize the impact.
  • The stepped-up basis for federal capital gains taxes remains a silver lining, potentially saving your heirs thousands if they sell the property.

Table of Contents

What You Need to Know About Prop 19

Prop 19 reshaped California’s property tax rules, specifically affecting how properties are reassessed when passed down to heirs. Here are the key points landlords should be aware of:

  • Reassessment to Market Value: Inherited properties are subject to property tax reassessment at current market value unless the inheriting child moves into the property as their primary residence within one year. If they don’t, the property tax bill can skyrocket, forcing heirs to sell the property to cover taxes.
  • Exclusion Cap: Even if the inheriting child moves in, the property is only exempt from reassessment up to $1 million over the original assessed value. Anything above that is taxed at today’s market rates.

In areas like Orange County or San Diego, where property values are high, the $1 million exclusion cap can be quickly surpassed, making it difficult for families to retain generational rental properties.

What About Housing Providers?

While Prop 19 allows homeowners aged 55 and older to transfer their primary residence’s tax base to a new property up to three times, this benefit does not apply to rental properties.

For housing providers, this means:

  • Rental properties are reassessed to current market value upon inheritance.
  • The taxable value of a rental property cannot be transferred to a new property.

This can result in significantly higher property taxes, reducing the profitability of inherited rental properties.

Tax Planning Strategies to Mitigate Prop 19 Impacts

While Prop 19 presents challenges for landlords, there are strategies to help reduce the tax burden and preserve generational wealth.

Gradual Ownership Transfers Through LLCs

One way to potentially avoid reassessment is by transferring property ownership gradually through a Family LLC.

Setting up a Family LLC allows you to slowly transfer ownership shares to your heirs over time. This method can help reduce the risk of reassessment, but it requires careful planning and legal guidance.

Trust Planning

Certain types of trusts can help mitigate the impacts of Prop 19 by providing additional protections during property transfers. For example, a revocable living trust can help manage ownership transitions more efficiently and may offer tax benefits.

While trusts aren’t a cure-all, they can be part of a broader estate planning strategy to reduce taxes and avoid probate. Consulting with a trust attorney or financial advisor is crucial to understanding your options.

Act Early

The earlier you start planning, the more flexibility you’ll have. Waiting too long to transfer property ownership can limit your options and result in higher tax bills.

If transferring property is on your radar, consult with a property management expert or tax advisor to create a long-term plan that fits your needs.

Silver Linings: The Stepped-Up Basis

Despite the challenges of Prop 19, one significant tax advantage remains—the stepped-up basis for federal capital gains taxes.

Here’s how it works:

When your heirs inherit a property, the capital gains tax is based on the property’s value at the time of inheritance—not the original purchase price.

For example:

  • If you bought a property for $300,000 and it’s worth $3 million when inherited, the $2.7 million in equity is shielded from capital gains taxes.
  • If your heirs decide to sell the property, they’ll only pay taxes on the difference between the inherited value and the sale price, saving them hundreds of thousands of dollars.

This stepped-up basis can help reduce the overall tax burden when heirs sell the property, making it a valuable tool for preserving wealth.

We’re Here to Help Protect Your Investment

At Good Life Property Management, we understand that managing rental properties and navigating California’s complex tax laws can be challenging. We’re here to help you make informed decisions and protect your investment for future generations.

If you have questions about Prop 19 or need help managing your rental property, schedule a call with one of our Good Life experts. We’ll help ensure you’re prepared for any changes in property tax laws and ready to safeguard your assets.

FAQs About Prop 19 for Landlords

How does Prop 19 affect inherited rental properties?

Prop 19 requires inherited rental properties to be reassessed at current market value unless the inheriting child uses the property as their primary residence within one year. This reassessment often results in significantly higher property taxes.

Can rental property owners transfer their tax base under Prop 19?

No, the tax base transfer benefit under Prop 19 only applies to primary residences. Rental properties do not qualify for this benefit, meaning landlords cannot transfer their taxable value to a new property.

What is the $1 million exclusion cap in Prop 19?

The $1 million exclusion cap allows heirs to inherit a property without reassessment on the assessed value plus $1 million. Any value above that is reassessed at the current market rate, leading to higher property taxes.

How can I reduce property taxes on inherited rental properties?

Property owners can reduce property taxes through gradual ownership transfers via Family LLCs, trust planning, and early action to mitigate the impact of reassessment. Consulting with a tax advisor or estate planning expert is essential for exploring these options.

What is the stepped-up basis, and how does it benefit heirs?

The stepped-up basis adjusts the property’s value for capital gains tax purposes to its market value at the time of inheritance. This means heirs only pay capital gains taxes on the difference between the inherited value and the sale price, potentially saving them substantial amounts in taxes.

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