What Is the ‘Death Tax’ and Why Should You Care?

By Andrew Manning

This Valentine’s Day there’s one topic on a lot of real estate consumers’ minds: death. Specifically, the “death tax,” which was buried in the “Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act” (also known as Proposition 19) back in 2020. Proposition 19 passed with a narrow 51% of the vote.

While the title of the act sounds good, because we all want to help seniors, disabled, families and victims of wildfire or natural disasters, the voters of this bill probably didn’t realize that there was fine print involved in Proposition 19 and now, this “Death Tax” is killing housing affordability for inherited properties in California.

Essentially, according to the San Diego Union-Tribune, the passing of this proposition “gutted [Californian’s] property inheritance rights and long-standing caps on tax assessments established by Proposition 13 in 1978.”

So, what is the “death tax”? 

For decades, since Proposition 13 was passed in 1978, seniors used to be able to transfer their property tax base one time only at age 55+, and only in certain cooperating counties in California. The upleg property could be no more than 10% higher in value than the downleg (property they were selling). Now with Proposition 19, they can transfer up to three times at ANY price to ANY county in California. This is a game-changer for seniors who may want to take equity and buy up to a more expensive property using the equity in their current home. If they move somewhere they don’t like or circumstances change, they can buy/sell up to two additional times and retain their original property tax base. 

With this “Death Tax,” when property is passed from parents to children, it’s reassessed to current market value. This means while you might have paid about $2,000 or $3,000 a year in property taxes, you’ll now be paying upwards of $15,000 or $20,000 a year, and continue to pay that every single year you own the property. In fact, some estimates report that property taxes will climb a whopping 1,500 percent under this reassessment. So, just by keeping property that is rightfully yours, you’ll now have to pay tens of thousands of dollars more year after year. At a time when housing affordability is already at historical lows, this severely impacts a lot of people. 

Basically, if a family member passes away and leaves the house to a loved one, unless they move in within the year and make it their primary residence, the tax bill gets reassessed to current market value and they’ll have to pay that annually. There is one exception: If a new owner moves into the deceased’s principal residence within a year, the first $1 million in value is waived. However, practically speaking, this exception doesn’t provide much relief. According to California Insider Opinion, the reality is that even if people DO move into the property within the year, they still often have to pay the reassessed tax bill. Assessors offices are so overloaded processing these new tax bills that they’ll often tell new homeowners to pay the increase and they’ll “refund” the money later if it isn’t owed. This means that people who are grieving loved ones in California are receiving $50,000 property tax bills right along with their sympathy cards. 

And it was difficult to see this coming. All the advertisements for Proposition 19 spoke about protecting wildlife victims and occasionally, about helping seniors move, and of course California voters want to support that! Why wouldn’t they? But buried in the fine print was a small stipulation that is now known as the “death bill,” delivering a fatal blow to housing affordability and preventing many from affording to live in the property they inherited, a home that is rightfully theirs. There is a popular movement gaining traction to repeal the “Death Tax” so stay tuned, but for now unfortunately it was wrapped into Prop 19 and currently the law.

Andrew Manning • REALTOR® • Berkshire Hathaway HomeServices California Properties • DRE: 00941825 • 818-380-2147 • andrew@andrewmanning.com