By Kit Driscoll.

Please note: Coblentz is not taking on new clients for Proposition 19 matters at this time.

California’s unofficial election results[1] indicate that Proposition 19, one of the two Propositions affecting California property tax rules, passed and will affect transfers after February 15, 2021.  Commercial and industrial property owners need not be concerned about the split roll that would have assessed property taxes based on fair market value as Proposition 15 did not pass.  Real property owners should consider strategies to preserve low assessed values of legacy properties before Proposition 19 takes effect.

Proposition 19 dramatically changes the property tax rules exempting the following:

• Primary residence transactions for certain individuals such as those over age 55, severely disabled, or victims of wildfires or other natural disasters. The new rules for this category are generally favorable and may result in tax savings for a qualifying homeowner by allowing the assessed value of their principal residence to be transferred to a replacement residence in any California county. Unlike current law, the new rules may provide a significant benefit even if the replacement residence is more expensive than the principal residence that is transferred.
• Certain intra-family transfers. The new rules for parent-child and certain other intra-family transfers significantly increase the cost to future generations of keeping legacy properties within the family, as illustrated below.[2]

Current Property Tax Rules and Exemptions

California property tax is assessed based on the property’s purchase price and the cost of any improvements to the property. Unless a “change of ownership” occurs, the assessed value of real property increases by no more than 2% annually. Because average appreciation of California real property has far exceeded the 2% annual adjustment since the enactment of Proposition 13 in 1978, long time owners of California real estate generally enjoy a very low property tax burden relative to owners of newly acquired property.

California currently provides two valuable exemptions from reassessment, which allow the continuation of this benefit after transfers of qualifying property interests between parents and children.[3] First, a transfer of parent’s principal residence to a child is completely exempted from reassessment. The child succeeds to the parent’s assessed value regardless of the value of the property or its assessed value at the time of transfer. Second, transfers of real property interests which are not the parent’s primary residence (residential or commercial) are exempted from reassessment to the extent of $1 million of assessed value, regardless of the fair market value of the property.

New Property Tax Exemptions Under Proposition 19

Proposition 19 revises the Parent-to-Child exemptions to limit (1) the types of transfers between parents and children that can be exempted from reassessment, and (2) the property tax benefit available. First, only a transfer of the parent’s principal residence to the child where the property continues as the child’s principal residence qualifies. Second, provided the transfer meets the principal residence requirements, the child’s assessed value is then determined based on whether the property’s value at the time of transfer is greater than the parent’s assessed value by more than $1 million. If the value of the property at the time of the transfer exceeds the parent’s assessed value by less than $1 million, then the child takes the parent’s assessed value. If the value of the property at the time of the transfer exceeds the parent’s assessed value by $1 million or more, then the child’s assessed value is the current value of the property less $1 million.

Illustration of Proposition 19

The following hypotheticals illustrate the consequences under current law versus Proposition 19.

Hypothetical No. 1 – Prop 19 Increases Taxes 10x

Facts:

• Property #1 is Mom’s principal residence: $10M FMV, $500,000 assessed value
• Property #2 is Mom’s secondary residence: $5M FMV, $1M assessed value
• Mom’s total assessed values that she pays property tax on is $1.5M
• Property tax rate is 1.25% (estimated)
• Mom’s estimated total property taxes are $18,750
• Mom gives Property #1 and Property #2 to Child and claims exemption
• Child does not use either property as principal residence

Child’s Assessed Values and Property Tax Consequences:

Current Law	Proposition 19
Property #1 assessed value $500,000 (exempt under R&T Code Section 63.1(a)(1)(A)) Property #2 assessed value $1M (exempt under R&T Code Section 63.1(a)(1)(B))	Properties #1 and #2 are both reassessed to their fair market value because of the requirement the property be both Mom and Child’s principal residence before and after transfer, respectively
Assessed value is $1.5M, total, same as Mom’s	Assessed value is $15M, total
Property tax is $18,750, total, same as Mom’s	Property tax is $187,500, total

 

Hypothetical No. 2 – Prop 19 Increases Taxes 9.3x

Facts:

• Same facts as Hypothetical No. 1, except that Child maintains Property #1 as Child’s principal residence after the transfer.

Child’s Assessed Values and Property Tax Consequences:

Current Law	Proposition 19
Same result as Hypothetical No. 1 Property #1 assessed value $500,000 (exempt under R&T Code Section 63.1(a)(1)(A)) Property #2 assessed value $1M (exempt under R&T Code Section 63.1(a)(1)(B))	Property #1 receives a limited exemption from reassessment of the fair market value, less $1M ($10M – $1M = $9M)[4] Property #2 is reassessed to its fair market value because of the requirement the property be both Mom and Child’s principal residence
Assessed value is $1.5M, total, same as Mom’s	Assessed value is $14M, total
Property tax is $18,750, total, same as Mom’s	Property tax is $175,000, total

 

 

[1]  See the “Unofficial Election Results” on the California Secretary of State’s website.

[2]  R & T Code Section 63.1 provides the “Parent-to-Child” exemptions. The Parent-to-Child exemptions are for transfers “between” parents and children. The Parent-to-Child exemptions are also available for transfers between grandparents and grandchildren in certain circumstances. For purposes of this illustration, “parent” is the transferor and “child” is the transferee.

[3]  Note that certain procedural requirements must be satisfied to benefit from these exemptions and that other types of exemptions exist other than the Parent-to-Child transfers.

[4]  If Property #1 FMV were instead $1M, then the assessed value would remain $500,000 and Child would have same property tax as Mom for Property #1

Before businesses can even breathe a sigh of relief for getting into compliance with the California Consumer Privacy Act (“CCPA”), they will now need to gear up for yet another first-of-its-kind privacy law in the form of the California Privacy Rights Act (“CPRA”). The CPRA, enacted by ballot initiative Proposition 24, appears to have passed with approximately 56% of the vote, though ballot results will not be certified until December 11.

The CPRA, sometimes dubbed “CCPA 2.0,” amends and expands the CCPA, keeping certain provisions in place while revising or adding new provisions. All businesses, especially those collecting sensitive personal information or information of minors, should re-evaluate their data collection, sharing, and use practices again in light of the new law and make necessary changes.

Select key provisions of CPRA include the following:

• California Privacy Protection Agency (“CPPA”) – CPRA creates an independent agency – the first of its kind – with authority and jurisdiction to implement and enforce CCPA. With an agency like this focused solely on enforcing privacy violations, businesses can expect much more rigorous enforcement of privacy laws in California. The CPPA would take over authority for issuing regulations from the Attorney General’s office, and it will be interesting to see how this new agency functions and what its priorities of enforcement will be.
• Sensitive Personal Information – CPRA introduces a new category of personal information called “sensitive personal information” encompassing health data, sexual orientation, race, origin, geolocation, financial data, genetic data, biometric data, social security number, driver’s license, etc. It also allows consumers the right to limit the use and disclosure of such sensitive personal information by businesses. Accordingly, businesses may need to add yet another link to their website homepage to allow consumers to exercise their rights to limit the use of their sensitive information.
• Behavioral Advertising – Importantly, the CPRA attempts to address the gray area in the CCPA regarding whether opt-out rights applicable to data “sales” apply to the sharing of personal information for behavioral advertising. The CPRA explicitly extends consumer opt-out rights to the sharing of personal information by a business to a third party for “cross-context behavioral advertising.” Many companies may have already been treating such data sharing as a potential “sale” under the CCPA, in which case, the CPRA may not require further significant modifications to current practices. But companies that were taking the position that the opt-out right did not apply to behavioral advertising will have to alter their practices.
• Definition of Covered Businesses – CPRA modifies the definition of a “business” to only include those businesses that collect information of 100,000 California consumers or households. This threshold is double the current 50,000 California consumers or households trigger. However, CPRA will not be effective until 2023, requiring businesses falling in that 50,000 threshold to comply with the CCPA in the interim. Additionally, the CPRA expands its application to businesses that derive 50% of their revenue from selling – or “sharing” – personal information.
• Expanded Consumer Rights – CPRA will give consumers additional rights such as the right to correct their data, right to not be retaliated against for exercising their rights, right to prevent companies from storing their data longer than necessary, right to opt-out of companies tracking precise geolocation within less than 1/3 of a mile, etc. Consumers’ Right to Know will also be expanded under the CPRA to include all information collected about them as opposed to only information collected by the business in the past 12 months.
• Increased Liabilities – The CPRA leaves in place the CCPA’s private cause of action for data breaches, but adds consumer login credentials, such as email and password or security questions and answers, to the types of data that trigger the private right of action. The CPRA also triples fines related to the collection and sale of personal information of minors.

The CPRA becomes effective January 1, 2023, but businesses will need to comply with certain provisions and requirements with respect to information collected as of January 1, 2022. Covered businesses must still comply with the CCPA, and enforcement of the CCPA by the Attorney General is expected to continue in the meantime.

Overall, this caps a rollercoaster year for privacy legislation in California, as summarized here. If your company needs assistance with any privacy issues, Coblentz Patch Duffy & Bass LLP can help. Please contact Scott Hall at shall@coblentzlaw.com for further information or assistance.