If you and I have spoken about your estate planning strategy, you have probably heard me suggest that Biden and the Democrats were going to make some changes to the federal estate tax law. This week, Biden unveiled some proposed changes.
 
The federal estate tax exemption is currently extremely high at $11.58 million per person. This means that you can leave $11.58 million to your loved ones without estate tax consequence.  The biggest surprise is that the estate tax exemption will not change, as previously discussed, according to Biden’s The American Families Plan.  That leaves many of us untouched by the estate tax.  That's the good news.
 
Now, onto the not so good news. Biden is attempting to remove stepped up basis. This means that currently, when a decedent passes away, the assets they leave behind get a step up in tax basis.  In sum, this saves beneficiaries and heirs a lot of money when it comes to selling those assets.  It can lessen and even completely eradicate capital gains taxes.  Biden’s proposal will eliminate that step-up.  Since this will result in a significant tax for many of us, there are thankfully some exceptions.  Gains of less than $1 million, or $2 million, per couple would not be taxed.

Let's not hit the panic button yet. This proposal is not law yet. The Democrats have a slim margin and this would be a hit for a lot of citizens. So, the answer right now is to wait and see...

Proposition 19 is one complicated piece of legislation. It is difficult to explain without a brief discussion of the backstory.  County assessors administer the assessment of your real property.  Proposition 13, passed in 1978, limits the property taxes to 1% of the assessed value of the property.  It also limits assessment to a 2% increase unless there is a change in ownership or construction – in which case there is an assessment. 

Propositions 58 and 193 exclusions were also created which allowed property to transfer between family members including parents and children (58); grandparent to grandchild (193).  Propositions 60 and 90 allow homeowners 55+ years of age to sell their primary residence and transfer the base year value of that property to a replacement residence if certain conditions are met. Proposition 60 applies to intra-county transfers, while Proposition 90 applies to inter-county transfers under certain conditions

The year that the property is assessed for property tax purposes is referred to as the “base year.”  The assessed value is generally the sales price. Thus, if grandma and grandpa bought their home for $300,000, the base year value is $300,000.  Property tax will be calculated based upon $300,000. If grandma and grandpa sold that same property in 2021 for $1,5000,000 the property would be assessed at $1,500,000.

Prior to Proposition 19 grandma and grandpa could leave the home to a grandchild, and the house would be excluded from reassessment, resulting in an enormous savings on property tax. Now that Proposition 19 is in effect, the grandchild would not be excluded, subject to some exceptions.  The County would assess the property upon the transfer to the grandchild, except under some very narrow circumstances.
 
Questions on how this may affect your home or homes? Call me for a consultation.