PD Editorial: Another blow for families trying to keep their homes

California families hoping to pass homes or farms from one generation to the next already got an unwelcome, and potentially costly, surprise from Proposition 19.

There may another one on the way in President Joe Biden’s tax plan.

Proposition 19 was placed on the November 2020 ballot by state lawmakers, with enthusiastic support from the real estate sales industry. The measure was pitched as homebuying help for elders, disabled people and wildfire victims. As a sweetener, it promised funding for fighting fires.

The mechanism for assisting these would-be homebuyers: reduced property taxes.

But the nuts and bolts of the plan, specifically who would pay the cost for allowing people to move without giving up Proposition 13-protected tax bills, went unmentioned in the TV ads and other campaign material. On Election Day, voters approved Prop. 19 by a narrow margin.

To make it all pencil out, Prop. 19 mandated that inherited property must be reassessed to market value unless the heir moves in and makes it their primary residence.

There’s a twist: If the difference between the assessed value prior to inheritance and fair market values is more than $1 million — a median-priced home in much of the Bay Area — a reassessment using a convoluted formula is mandatory, even if the heir moves in.

A home is often the only asset of any real value that non-wealthy parents can pass on to their children.

Under Prop. 19, families hoping to turn a parent or grandparent’s home into an income-earning rental property, or just to keep it as a family home for another generation, could face a whopping property tax increase, potentially forcing them to sell (also resulting in reassessment and a hefty increase in property taxes for the next owner).

Although backers of Prop. 19 said family farms were exempt, the state Board of Equalization told county tax assessors the new rules apply to farms with a principal residence.

As word spread, people rushed to transfer property between generations prior to a February deadline.

The North Bay Business Journal reports a sevenfold year-over-year increase in property transfer requests handled by North Bay county assessors during the period between the election and the deadline. There were more than 900 transfers in Sonoma County alone.

Now comes a proposal to change federal tax rules that would be a double whammy for families hoping to leave a home to the next generation.

Biden wants to raise the capital gains tax rate to help pay for new benefits such as free community college and paid family leave. There are good arguments for taxing capital gains at the same rate as earned income.

Biden’s plan also changes what’s known as “stepped-up basis.” Under the current system, when a home or stock gets passed on, heirs aren’t liable for capital gains taxes on any prior increase in market value. The proposed change would calculate capital gains based on the value when the parents first bought the asset and tax the estate. Heirs may be stuck with selling to sell to pay the bill.

Only a small majority of Americans own stocks, and that figure has declined sharply over the past two decades. Nearly two-thirds of Americans own homes, and for many families, it is their largest asset. Exempting homes from the changes to “stepped-up basis” would reduce revenue for the government, but it would help people who want to hang on to family homes.

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