California’s Proposition 19 (effective February 16, 2021) changed long-standing rules about how property is taxed when passed from parent to child. Before Prop 19, broad exclusions under Prop 58 generally allowed children to inherit property — including second homes, rental buildings or commercial property — without triggering reassessment to current market value. Under the old law, upon receiving an inherited property, the child could keep the parent’s low taxable value regardless if the property was a main residence or income property. Now, Prop 19 limits the parent-to-child exclusion and increases tax on income properties.
Main Residence: Prop 19 allows a limited exemption to partially avoid reassessment (up to $1,000,000 of appreciation) if:
• The property is the parent’s principal residence, and
• The child moves into it as their primary home within one year of the transfer and files for a homeowner’s exemption (Note: this partial exemption is only allowed while the child continues to live in parent’s former main residence. Child moves out = property tax goes up to market rate).
Income Property: If those conditions aren’t met — as is almost always the case with income properties, vacation homes, rentals, commercial real estate, or second homes — Prop 19 reassessed to current fair market value upon parent’s death. That can dramatically increase annual property taxes for a child inheriting property, because under California’s property tax system (Prop 13), the property tax for parents was kept historically low based on the assessed value at the time of parents’ purchase (plus 1% increase/yr.).
A Numerical Example:
Imagine a parent owns an income property — a small apartment building — with these details at the time of death:
• Fair Market Value at Death: $2,000,000
• Parent’s current assessed (taxable) value: $500,000
• Property tax rate: ~1% of Parent’s current assessed value = $5,000
Before Prop 19: If the parent died under the old law (Prop 58), the child might have kept the taxable value at $500,000, and benefit from paying only about $5,000/year in property tax just like their parent did.
After Prop 19: Because this is not a principal residence, there is no parent-child exclusion available. So, for the inheriting child, the taxable value resets to the market value of $2,000,000 at the parent’s death.
• Child’s New property tax ≈ 1% × $2,000,000 = $20,000/year
That’s an increase of $15,000 annually compared with keeping the old assessed value. Sticker shock! That’s 15,000 additional (on top of the old $5,000 tax bill) after tax dollars per year that inheriting child must pay from their take home paycheck. $15,000 per year is more than what most people save for retirement each year!
Long-Term Cost of Increased Tax:
Below is an illustration of how that extra $15,000 per year compounds in value over 20 years if invested at a 10% annual return:
Year Additional $15,000 Tax Cost Future Value at 10%
1 $15,000 $16,500
5 $75,000 $121,550
10 $150,000 $389,000
20 $300,000 $1,958,000
After 20 years, those $15,000 in additional property taxes could represent the equivalent of nearly $2 million in future value at a 10% return — underscoring how costly reassessment can be over time. On the other hand, if the parent, child, and legal advisor work together during parent’s life to avoid this property tax increase, the saving is like handing the child a $2,000,000 cash gift per property; also meaning, that if parent had two properties, that’s a $4,000,000 gift … on top of child’s inheritance!
Conclusion:
Prop 19 significantly restrains intergenerational property tax relief in California. While it preserves limited protection for principal residences, it mostly eliminates the old blanket parent-to-child exclusion — especially for inherited investment or income properties. As a result, many heirs face much higher property tax bills after a parent’s death than they would have under the previous regime. Consulting with a tax or estate planning professional before making decisions about property or trusts can help families navigate these rules and their long-term financial impact.
Those interested in receiving further guidance may contact me for a complimentary consultation in either San Mateo or San Francisco; just say “Mary Hawley sent me!”
Jason Louie
THE LAW OFFICES OF JASON LOUIE, P.C.
Estates * Wills * Trsusts
490 Post Street, Suite 910
San Francisco, CA 94102
Phone: (415) 240-4646