What Exactly is Proposition 13 and How Does it Still Relate to Estate Planning?

     Get out your disco records and leisure suits, we are going back in time.  If you don’t know what those are, this article is for you.  Way back in 1978, the voters in California eagerly approved Proposition 13, adding Article XIII A to the California Constitution. Article XIII A generally limits the amount of ad valorem tax to a maximum of 1 percent of the full cash value of the real property.  So what does this mean?  Ad valorem tax is a tax based on the assessed value of real estate or personal property. Property ad valorem taxes are the major source of revenue for state and municipal governments.  Municipal property ad valorem taxes are also known as “property taxes”.  
     For purposes of the Prop 13 limitation, the Constitution defines “full cash value” to mean a county assessor’s valuation of real property as shown on the 1975-76 tax bill, or thereafter, the appraised value of that real property when purchased, newly constructed, or a change in ownership has occurred. As long as the property has the same owner, its assessed value generally cannot increase by more than 2% per year.  This is true even if the property’s market value is increasing at a faster rate. As a result, the market value of many properties is often higher than the assessed value.  In many states, property is reassessed each and every year so the tax keeps up with the value of the property.  We have Prop 13 to thank for our not having annual reassessments.
     When it was passed in 1978, Proposition 13 did not provide for any exclusions from what constituted a “change in ownership”.  Not until the implementation process of Proposition 13, were various exclusions contemplated.  In defining change in ownership, the Legislature provided examples of what is not a change in ownership, like an interspousal transfer. Otherwise, in that example, there might have been a property tax reassessment if a spouse died.  In addition, subsequent amendments to article XIII A have been approved by voters which enacted other change in ownership exclusions. Examples of these include base year value transfers for persons over the age of 55 [Revenue and Taxation Code section 69.5 ] and the exclusion of parent-child transfers [Revenue and Taxation Code section 63.1, commonly known as Prop. 58].  So even though this was enacted way back in 1978, it has real life relevance to us all today.  If a parent dies and leaves a home to his or her child, to keep the property tax base, the child must file a Proposition 58 form to claim the exemption from reassessment.  That keeps the property tax at the lower parent’s level.  This is a huge benefit to a family wanting to keep the family home.

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