A recent legacy case illustrates how Proposition 19 impacts grandparents wishing to leave their family vineyard property to their granddaughter.
Change in the Law
Effective February 16, 2021, Prop. 19 modified the reassessment exclusion for parents and grandparents wishing to pass down their property to their children or grandchildren who were not going to live there, leaving certain estates vulnerable.
What About the Exclusion Limits?
Prior to Prop. 19, primary residences of unlimited value could be transferred avoiding reassessment up to an additional $1 million of assessed value. This also had zero requirement that the child lives at that property. Importantly the value was assessed which differs from market value.
Under Prop. 19, the calculation for the exclusion has changed drastically. Prop. 19 did away with the $1M exclusion for properties other than principle residence properties. By way of contrast, other states will allow such exclusions for heritage legacy family properties such as a summer cottage. In California, however, anything other than a principal residence will be reassessed subject to certain limited exclusions.
In the case of a grandparent-grandchild transfer, Prop 19 presents additional complications as it prevents non-skip transfers. Under Prop. 19, for a property to pass from a grandparent to grandchild and benefit from the continuing tax basis, both the grandparents and parents of the grandchild must be dead. Or the non-bloodline parent must be divorced from the deceased lineal parent. The intent is not to skip over a generation. The transfer can only be made to the parents and then to the granddaughter.
There is Some Good News
There is no limit to the number of family homes or family farms that may be transferred under the intergenerational transfer exclusion. For example:
1. The parents sell or transfer the family home to their oldest child, which becomes the oldest child’s family home.
2. The parents purchase a smaller home, but the smaller home is still too large, and the parents sell the smaller home to their middle child.
3. The parents subsequently buy a condominium, which becomes their family home. Both children qualify for the intergenerational transfer exclusion.
4. Some years later, the parents transfer the condominium to their granddaughter, who is the daughter of their youngest child. If their youngest child passed away prior to the transfer, then the transfer can also qualify for the intergenerational transfer exclusion.
5. Lastly, it is possible to transfer one family farm and one family residence at the same time, but each would be subject to the $1M allowable exclusion cap.
Vineyard Winery Meets Criteria for a Family FarmGoing back to the situation of a vineyard passing to a granddaughter, Prop. 19 does have an applicable carve-out. Parents may still transfer their family home or family farm to their children or grandchildren, and the property will not be reassessed in full if at least one of the children lives in the primary residence or maintains the property as a family farm. An active vineyard can be classified as a family farm defined under Prop 19 as “any real property which is under cultivation… or that is being used to produce any agricultural commodity,” classifying the property as a family farm.