Propositions 15 and 19 Could Reshape California Real Property Tax Law

Propositions 15 and 19 Could Reshape California Real Property Tax Law


By  David E. Graff
October 1, 2020

Proposition 13 Generally

Proposition 13, approved by California voters in 1978, amended the Constitution of California with sweeping changes to California’s tax laws.  Proposition 13 is embodied in Article XIII A of California’s Constitution, which is, in turn, embodied in California Revenue and Tax Code Sections 50 through 100.96.

The law’s most significant effects are: (1) the requirement of a two-thirds majority in both legislative houses for future tax increases; and (2) capping the rate of real property tax at one percent (1%) of the assessed value of all property, and restricting annual increases of assessed value to two percent (2%) per year.

Proposition 13 sets a “base year” assessed value for real property taxation, generally based upon the purchase price of the property.  Unless there is a specific event that causes a full or partial reassessment of the property, the base year assessed value can only increase a maximum of 2% per year (which, historically, has been much less than the rate of growth in real property values).  The events that cause reassessment of property are generally either new construction or “changes in ownership.”  The rules determining whether a change in ownership has occurred (which are not discussed in this article) are extremely complex, especially as they relate to trusts and entities.

Currently, the protections described above apply to all types of real property: residential, commercial, industrial, and agricultural.  One of the ballot measures you will be voting on this November, Proposition 15, seeks to change that.

Also, there are numerous exceptions that prevent reassessment of base year assessed values.  For example, currently, if property is being transferred between parents and children (or grandparents and grandchildren), it may qualify for an exclusion from reassessment, notwithstanding a change in ownership.  A second ballot measure on the ballot this November, Proposition 19, seeks to make significant changes to those exclusions.



Proposition 15

2020 ballot measure Proposition 15 would eliminate restrictions of annual increases of assessed value for all commercial and industrial properties (except those zoned as commercial agriculture).  For all other properties (including residential properties), the 2% per year restrictions on annual increases would remain.  This would create what has been called a “split roll” between different types of properties based upon their use.

Commercial/industrial properties would be subject to reassessment to fair market value as of the effective date of the new law.  Commercial/industrial property will be periodically reassessed “no less frequently than every three years as determined by the Legislature.”  The legislature is further directed to develop a process for hearing appeals resulting from the reassessment of properties (of which, this author suspects, there will be more than a few).

For mixed-use property, only that portion of the property that is used as commercial or industrial will be reassessed.  The legislature will have the power (but not requirement) to further exclude the commercial/industrial share of a mixed-use property if that commercial/industrial share is 25% or less of the property by square footage.

Of course, there cannot be a new rule without exceptions.  Because Proposition 15 is designed the collect additional tax revenue from larger, wealthier, corporations and businesses, there is a key (but, perhaps poorly thought-out) exception for the “little guy”.

Proposition 15 excepts properties whose business owners have $3,000,000 or less in commercial/industrial property holdings in California.  The $3,000,000 amount is adjusted for inflation, but separately for each county (so it is not clear how this will work for owners of properties in multiple counties).

The owner of one or more commercial/industrial properties must aggregate the values of all such properties.  If the total is below the $3,000,000 threshold, then all of that owners’ commercial/industrial properties will avoid periodic reassessment (and retain the benefits of a maximum 2% annual increase in assessed value).  If the total is above the $3,000,000 threshold, then all of that owners’ commercial/industrial properties will be subject to periodic reassessment.

The most problematic issue with this concept is that Proposition 15 provides that the aggregation includes both direct and indirect beneficial ownership.  For example, consider the individual who owns a 50% interest in each of ten limited liability companies, which, in turn, each own a separate $1,000,000 industrial property.  Using plain language, one would say that the individual indirectly owns $5,000,000 worth of California industrial property.

Applying Proposition 15 might result in every one of the ten properties being subject to periodic reassessment.  However, the other LLC owners may be ten unrelated individuals who only own $500,000 worth of industrial property.

Such a result would not be fair to the other LLC owners.  If each of the properties are partially periodically reassessed, will the LLC governing documents apportion the additional property tax costs to the individual owner causing the increased tax?

The effective date of Proposition 15 also does not escape complexity.  The change from the existing base year assessed value to the periodic market reassessments will be phased-in beginning in fiscal year July 1, 2022 through June 30, 2023.  However, properties, such as retail centers, whose occupants are 50 percent or more “small businesses” will be switched to periodic assessment beginning in fiscal year July 1, 2025 through June 30, 2026, or at even a further later date that the legislature determines.[1]

Unfortunately, there may be limited planning opportunities to deal with the effects of Proposition 15.  If Proposition 15 passes and applies to a given property, property taxes will increase.  Those facing substantial increases in property tax expenses (whether landlord or tenant under a triple-net lease) may find they can no longer afford that California commercial or industrial property.

However, if a specific individual knows that their commercial/industrial property will be subject to periodic reassessment, it will likely impact their other non-tax decisions (including decisions as to what properties they may wish to sell, gift, or otherwise transfer).


Proposition 19

Before getting into the specifics of Proposition 19, it is helpful to summarize the existing law related to certain exceptions that prevent reassessment of base year assessed values, notwithstanding a change in ownership.

In 1986 Californians passed Proposition 58, which allows homeowners to transfer real property to (or from) their children without triggering the reassessment consequences of a “change in ownership”.[2]  A child[3] can receive their parents’ California real property and retain the parents’ base year assessed value, which is almost always lower than the property’s then-current fair market value.  The transfer can be by sale, gift, or bequest.

This is one of the greatest tax benefits that a parent can provide for their child.  For example, it is not uncommon for a child to inherit their parents’ residence, perhaps now worth over $1,000,000, and continue to pay a real property tax bill that might be less than $1,000 per year.  In that example, the child will save approximately $9,000 per year, each year that the child owns the house.

The Proposition 58 “parent-child exclusion” does have its limitations.  The exclusion from reassessment covers:


  • The entirety of the transferor’s principal residence, regardless of the fair market or assessed value; and
  • Up to $1,000,000 (not indexed to inflation) in assessed value[4] of other real property.

A “principal residence” is defined as a dwelling that is eligible for a homeowners’ exemption or a disabled veterans’ exemption as a result of the transferor’s (e.g., parent’s) ownership and occupation of the dwelling.

There is a similar “grandparent-to-grandchild exclusion”[5] from reassessment that applies to transfers of property between grandparents and grandchild (which apply, essentially, so long as the intervening child is deceased).

In 1986 Californians also passed Proposition 60, which allows homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home.[6]

However, the benefits of this law are limited, because: (1) The replacement home must be equal or lesser value than the original property; (2) must be purchased or newly constructed within two years of the sale of the present property; and, perhaps most limiting, (3) must be located in the same county as the original property.

With regards to the last limitation, there is an attempt in the existing law to provide some relief to older Californians who wished to “downsize” to a different county.  A county board of supervisors can elect to provide reciprocity with another county, to accept the transfer of base-year assessed value.  However, according to the Board of Equalization, as of 2018 there are only ten counties that have an ordinance enabling the intercounty base year value transfer.[7]  Santa Barbara County is not one of those counties.

2020 ballot measure Proposition 19 would amend Article XIII A of California’s Constitution in two ways, one designed to lessen property tax burdens and a second to increase tax.

First, the proposition will remove the intercounty restriction of Proposition 60/California Revenue and Tax Code § 69.5.  Following the implementation of the law, which would have an effective date of April 1, 2021, anyone who is over 55 years of age will be able to transfer their base year assessed value to any other property in California, regardless as to the location of the replacement property.  The replacement primary residence must still be of equal or lesser value than the original primary residence to obtain a full transfer of base year value.

In addition to removing the intercounty restrictions, the proposed law also adds a new category of individual who can take advantage of the base year transfer: any victim of a wildfire or natural disaster.  Given the current spate of wildfires engulfing large portions of the state, and as the state is likely to see more and more disasters in future years, this aspect of Proposition 19 might end up being the most impactful.  However, this author can foresee a number of challenges of implementation, including, for example, disagreements taxpayers may have with county assessors as to the value of the original, possibly damaged or destroyed, residence (impacting the allowed value of replacement property).

Second, Proposition 19 will severely reduce the benefits of the parent-child exclusion from reassessment.  Essentially, there will only be a parent-child (or grandparent-to-grandchild) benefit to the transfer of property that will be used by the child (or grandchild) as their “family home”.  It will no longer be relevant whether the transferor (e.g., parent) used the property as their principal residence; rather, the analysis will be whether the transferee (e.g., child) will use the property as their family home.

Proposition 19 defines “family home” in the same manner as “principal residence.”  However, Proposition 19 further includes “family farm” within in the definition of family home.  So, in some cases, family home will be defined in a much broader sense than principal residence.

Further, even in those cases where the transferee will use the property as their family home, the transferee may still see a property tax increase.  The proposed law allows for the transferee to avoid a reassessment increase on only the first $1,000,000 (indexed to inflation) of difference between the then-current real property tax assessed value (i.e., the base-year plus annual adjustments) and the market value of the property at the time of the transfer.

The language Proposition 19 uses to effectuate this concept is quite convoluted, but may be interpreted as shown in the following example:  Parents transfer property to a transferee child (who intends to occupy it as her residence) that has a real property tax assessed value of $300,000, but a market value of $1,700,000.  There is a $1,400,000 difference between $1,700,000 and $300,000, but the child is only able to avoid reassessment on the first $1,000,000 of that amount.  Therefore, the child will end up with a new base year assessed value of $700,000 (the parents’ $300,000 base year plus $400,000).

The changes to the parent-child exclusion will be effective February 16, 2021 (a slightly earlier date than the removal of the intercounty restrictions).

The ballot measure would also create a California Fire Response Fund (CFRF) and require that 75% of the funds raised by the new assessments be added to that fund to be used for fire-protection purposes.

Due to the February 16, 2021 effective date, there will be limited time to consider and implement planning to deal with the effect of a loss of the traditional parent-child exclusion.  And, depending upon when election results are certified, there may not be much time to act before the end of the year.

Certainly, for those clients who wish to preserve low property tax bases, and who can also afford to transfer wealth currently, it would be beneficial to transfer properties to children before the law takes effect.

Remember that those transfers can be by gift or by sale.  If the parent/property owner does not necessarily want to give up an income stream associated with income-producing property, the parent might consider selling their property in exchange for a promissory note (i.e., seller-financing).  And, if the parent wishes to avoid potential capital gains on such a sale, the parent might further consider selling that property to an intentionally defective grantor trust (IDGT).  This technique has an added benefit of using minimal amounts of a client’s lifetime gift and estate tax exemption, which is helpful in cases where the client might have limited remaining exemption.

Under current law (and before Proposition 19 comes into effect, if at all), careful consideration must go into how best to apply the existing $1,000,000 of assessed value of non-principal residence property in the context of a parent-to-child transfer.  Clients should consider the difference between the market and assessed values of properties, as well as the duration the child is likely to hold on to ownership of the property.

If both Propositions 15 and 19 pass, planning before they both take effect should consider the greater benefit of applying existing parent-to-child transfers to residential and agricultural property, as opposed to commercial and industrial which would end up with periodic reassessment in future years.



[1] However, keep in mind that the “lien date” for any fiscal year is January 1st of that year.  Meaning that the lien date for July 1, 2022 through June 30, 2023 is actually January 1, 2022.

[2] California Revenue and Tax Code § 63.1.

[3] There are numerous complications when property passes in trust for the benefit of a child (and/or other individuals), which must be analyzed carefully to ensure qualification for the parent-child exemption.  Also, it is important to point out that the parent-child exclusion is not available to real property vested in an entity (even if that entity is disregarded for income tax purposes, and even if that entity is passing entirely from a parent to a child).

[4] Article XIII A of California’s Constitution uses the term “full cash value”, which is subsequently defined as the assessed value of the property.

[5] Proposition 193, which passed in 1996.

[6] California Revenue and Tax Code § 69.5.

[7] Those counties are:  Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura.


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