California Proposition 19Changes to think about before February 16, 2021

Presented By:

Michael CordovaSenior Loan Officer

Guild Mortgage

879 W 190th St. #1150Gardena, CA 90248

310-200-1167

mcordova@guildmortgage.net

Bob GomezVice President -

Wealth ManagementUBS Financial Services

3030 Old Ranch Pkwy, Suite 300, Seal Beach, CA 90740

562-343-9206

bob.gomez@ubs.com

Michael CodyCPA MBT

Lieb, Cody & CompanyCertified Public Accountants

25550 Hawthorne Blvd., #100Torrance, CA 90505

310-378-1248

mike@liebcody.com

Regina FilipponeAttorney-At-Law

The Law Offices of Regina Filippone

24520 Hawthorne Blvd, #210Torrance, CA 90505

310-720-5906

regina@filipponelaw.com

Justice MastrionaInsurance Agent

Farmers Insurance

22925 Arlington Ave., #1, Torrance, CA 90501

310-400-9259

justice@hebsoninsurance.com

MICHAEL CORDOVASENIOR LOAN OFFICER - GUILD MORTGAGE

• 36 years of mortgage origination experience• Specializes in FHA, VA, and conventional home loan financing

•Michael transforms clients lives one mortgage plan at a time

REGINA FILIPPONEATTORNEY-AT-LAW - LAW OFFICES OF REGINA

FILIPPONE

• Has been a lawyer since 1993• Would rather be playing with dogs• Has a strong local network of professionals• Believes most problems can be solved with a

bada** attitude and ice cream

JUSTICE MASTRIONAINSURANCE AGENT - FARMERS INSURANCE

• Specializes in small businesses and high net worth individuals

• Born and raised in the South Bay• Office has over 150 years of experience and

8 licensed staff members• Member of Toppers, Championship,

President’s Council achievement clubs

BOB GOMEZWEALTH MANAGEMENT - UBS FINANCIAL SERVICES

• Comprehensive, Goals Based Financial Planning

• Guide Clients in Defining and Achieving their Financial Goals

• Institutional Investment Process

• Alternative Investments and Private Equity

• Long-Term Care Risk Management

MICHAEL CODYCPA MBT

LIEB, CODY & COMPANY CERTIFIED PUBLIC ACCOUNTANTS

Certified Public Accountant with over 20 years of experience

Works with with individuals, as well as small and large businesses assisting them with their financial, accounting and tax needs.

He is a graduate of Rowan University in Glassboro, NJ with a Bachelor’s degree in accounting. He is also a graduate of the University of Southern California with Master’s Degree in Business Taxation.

Mike, his wife Eva, and his two boys are residents of Rancho Palos Verdes and very active in their local school and community.

Mike’s firm is made up of ten professionals (five CPAs, two Enrolled Agents, one bookkeeper and two office assistants.) The firm enjoys the daily interactions with the business owners, high-net worth individuals and retirees alike and looks forward to be able to exceed your tax and accounting needs.

California Prop 19

Changes to think about before Feb

2021

PRESENTED BY

MICHAEL C CODY CPA MBTMIKE@LIEBCODY.COM

310.378.1248

Disclaimer

The following seminar is for discussion and educational purposes only. You should consult your personal tax, attorney and financial advisors regarding anything discussed in this seminar before you make any decisions.

“We are just talking here!!!!”

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MEETING AGENDA

1. Overview of Prop 13/Prop 582. Overview of Prop 19 (good to the bad)3. Examples of some changes4. QUESTIONS AND ANSWERS (Enter your questions in the chat section. We will try to cover at end. If not, I will follow-up after the presentation)

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2020Kept us all up at night for different

reasons

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Current Property Tax Structure

Property is reassessed when there is a Change in ownership (CIO) UNLESS an exemption applies. (PROP 13)

Parents can leave a primary home of ANY value to their children and no reassessment (PROP 58)

Each parent can leave $1m EACH in assessed value to children ($2M total) on additional properties (PROP 58)

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Proposition 13 1978 California enacted Proposition 13 Property assessed at 1% of Market Value when a “Change in Ownership”

(CIO) CIO includes sales, gift and Death transfer Thereafter, property taxes increases by CA Consumer Price Index –

capped at 2% 2% cap on increase even though real estate increases historically at 4% or

more per year Long Term owners of CA real estate have very low property tax burden

compared to owners of newly acquired property….see next slide…

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Proposition 131970

Mom and Dad buy condo in Redondo Beach for $30,000 in 1978 and move out a year later. Turn property into a rental.

The property is now worth $435,000 But the property tax assessed value is $71,000 Property taxes are about $850 per year

2020 In 2020, a family buys a similar Condo in Redondo Beach

for $435,000. The property tax assessed value is $435,000 Property taxes are $5,000 per year.

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Proposition 58 Proposition 58, adopted in 1986 provides that a transfer

between parents and children of a principal residence, as well as an additional $1 million of the full cash value of all additional real property, is excluded from the definition of a “change in ownership,” which would ordinarily necessitate property tax reassessment.

Proposition 193, adopted in 1996 further expanded this definition to include certain transfers between grandparents and grandchildren, but only if the grandchild’s parent is deceased.

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Example of Prop 13 and Prop 58 Mom and Dad die before 2/16/2021 Prop 58 lets the kids inherit the family house

and KEEP the parents Prop 13 taxes Property is worth $2,000,000, but assessed

value is $1,000,000 Property taxes are $12,500 per year. Property taxes stay the same and do not go up

to $25,000 Kids DO NOT have to live in the home! That is PROP 13 plus PROP 58.

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Proposition 19• Proposition 19 adds new provisions for a base year value transfer

of a primary residence for persons meeting several criteria.• The new law changes provisions of the parent-child and

grandparent-child exclusions.• We anticipate that the California Legislature will clarify these

procedures and definitions through future legislation.• The base year value transfer provisions become operative

on April 1, 2021.• The parent-child and grandparent-grandchild exclusion

provisions become operative on February 16, 2021.

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Parent-Child & Grandparent-Grandchild Exclusion 17

Base Year Value Transfer – Persons At Least Age 55/Disabled

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Proposition 19 (Goodstuff) Prop 19 allows you to take your Prop 13 taxes with you to a new home 3

(THREE) times in your life Even if the property is a MORE expensive property If you sell your residence and buy a replacement residence, even a more

expensive one, the difference in market value between the old and new homes is added to your tax base.

Only applies to people over age 55, the severely disabled and victims of wildfires and other natural disasters.

Applies to all counties in California.

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Proposition 19 (Goodstuff) DOWNSIZING

Husband and Wife buy a home in Torrance in 1980 for $200,000.

Today it is worth $1.2M Husband and Wife Pay Property tax of $5,000

per year Husband and Wife sell the Torrance home and

buy a home in Sacramento to be closer to their Daughter for $700,000.

They Continue to pay $5,000 per year in property tax

$1.2M home is replaced with a $700,000 home

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Proposition 19 (Goodstuff) UPGRADING

Husband and Wife buy a home in Torrance in 1980 for $200,000.

Today it is worth $1.2M

Husband and Wife Pay Property tax of $5,000 per year

Husband and Wife sell the Torrance home and buy a home in Manhattan Beach for $3.2M.

The first $1.2M in the new home is taxed at $5,000 per year

The next $2.0M is taxed at the current rates of $25K per year.

Annual tax of $30K with Prop 19

Annual tax of $40K without Prop 19

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Proposition 19 (Goodstuff) UPGRADING

Karen is over age 55 and sells her primary residence on June 28, 2021 for $700,000

Her Property tax base was $225,738 and annual taxes $2,800

On Jul 22, 2021 she buys a replacement primary residence for $800,000

Since the value of the replacement primary residence exceeds the value of the property sold, the difference in the value must be calculated and added to the transferred property tax base.

$800,000 - $700,000 = $100,000 (difference in values)

$225,738 + $100,000 = $325,738 (difference added to base)

New property tax base of replacement primary residence is $325,738

New property taxes about $4,000 per year.

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Proposition 19 (Bad Stuff) Parent to Child/Grandchild Transferred Eliminated Exception: Parent to Child transfer of a home by

gift/inheritance but child must occupy property at the home.

No reassessment on the assessed value plus $1M in Market Value, but reassessment over assessment value + $1M

Increase cost of keeping inherited property Effective Feb 16, 2021, but President’s Day is Feb 15th

and the Recorders' offices will all be closed So the REAL deadline is February 11th.

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Proposition 19 (Bad Stuff) Prop 19 Guts Prop 13 for Rentals Parent to Child/Grandchild Transfers Eliminated This means that your residential rentals will be

reassessed at death This means your commercial rentals will be

reassessed at death This means your industrial rentals will be reassessed

at death This means that your family vacation home or cabin

will be reassessed at death

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Proposition 13: Until 2/15/2021 Mom and Dad buy West LA home in 1970s for $100,000 Now worth $1,750,000 Assessed value of $425,000 Child inherits If child timely files a Claim for Reassessment Exclusion

Between Parent and Child, assessed value remains at $425,000.

Taxes stay at $5,300 and increase $106 per year

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Proposition 19: AFTER 2/15/2021 Mom and Dad buy West LA home in 1970s for $100,000 Now worth $1,750,000 Assessed value of $425,000 Child inherits, Child must move into Home The assessed value plus $1M ($1,425,000) not reassessed The value over $1,425,000 is reassessed Child’s assessed value is now $750,000 ($425,000 original

value + $325,000 (amount over $1,425,000) Property taxes $9,375 and increase $188 per year.

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Proposition 19: Death after 2/15/2021 NO REASSESSMENT

Judy dies, and her daughter Jessica inherits her home and makes her residence.

At Judy’s death the home has a FMV of $1.25 million and an assessed value of $500,000.

The $1.25 million FMV is less than $1.5 million (the $500,000 assessed value + $1 million).

As a result, the assessed value remains at $500,000 when Jessica inherits the property.

REASSESSMENT

Lucy dies, and her son Leon inherits her home and makes his residence.

At Lucy’s death, the home has a FMV of $2 million and an assessed value of $500,000.

The $2 million FMV is more than $1.5 million (the $500,000 assessed value + $1 million).

The new assessed value is $1 million ($500,000 + ($2 million - $500,000 -$1 million)).

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Rental Reassessment:After 2/15/2021 Lori buys $100,000 fourplex in 1975 Now worth $2,000,000 Current tax bill is $3,125 After 2/15/2021 when the kids inherit the fourplex the

taxes jump to $25,000 per year Prop 19 means higher property taxes when the parent

dies BUT you can plan now to preserve your Prop 13 but

you must act soon. Gift outright? - Issues if gift outright before death -

possible capital gains on sale, no stepped on death, no deprecation deductions.

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Rental Reassessment:After 2/15/2021Prop 13 vs Prop 19 Over 25 yearsProp 13: $102,000 in taxesProp 19 on Rental: $816,000 in taxes

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Can I just gift my real estate away now?

Yes you can! Pros: Simple, low legal fees Cons: Loss of Control, your basis carries over to your

child (capital gains tax), subject to child’s divorce, lawsuits and bankruptcy, loss of rental income and your child may die before you do.

Unlikely to be appropriate in most situations.

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What about Capital Gains?

Basis is purchase price, plus improvements minus depreciation

Sale Price – Basis = Taxable GainAt death, property generally gets an “adjusted

basis” to fair market value at date of death (stepped up value)

Biden?

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Sale of Rental – before deathLori buys $100,000 fourplex in 1975Now worth $2,000,000 If Lori sells now, she will have a

$1,900,000 gain. This will be taxed at her Capital gains

Rate both Fed and CA add up to about 37% (20% + 3.8% +13.3%)

Tax Bill is about $700,000

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Sale of Rental – after deathSusie buys $100,000 fourplex in 1975Now worth $2,000,000Susie DIES!New “Adjusted” cost basis becomes

$2M because of Federal Tax LawsKids sell home. No tax on gain. $2M sale price - $2M Basis = $0 gain!Kids SAVE $700K in Taxes. But Susie must die for kids to get tax

benefit

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Should Susie Give her kids the property? If Susie gives her fourplex to her kids

before Feb 16th, they MAY escape reassessment

However, they take Susie’s income tax basis in the property

If and when they sell the fourplex they will pay more taxes!

If they Keep the property and rent it out, they will not be able to depreciate from the stepped up basis.

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CA Revenue & Taxation Code Sec 60 For Property tax purposes, we will need to complete a transfer that is

a Change in Ownership (CIO) A CIO means a transfer of1. A Present Interest in real property2. Including a beneficial use thereof3. The value of which is substantially equal to the value of a fee

interest NOT CIO - Transfers between spouses, original owners, life estates,

leases less than 35 years Property reassessed when a CIO occurs unless a Reassessment

Exclusion applies.

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You can Give Prop 13 Tax Base to Child

Property is reassessed when a “Change in Ownership” (CIO) occurs UNLESS and “Exclusion from reassessment” applies.

Parent can transfer a primary home of any value to Child or Children and NO Reassessment

Parent can leave $1Mil in assessed value to children ($2Mil per couple) on properties other than residence

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Proposition 13 Trust Allows you to pass Prop 13 taxes to your children NOW! Preserve Prop 13 for your children for their lives Deed the property to the trust before February 16th

You are the Grantor, your children are beneficiaries and a Change of Ownership (CIO) occurs

Whether you can or should get an adjusted cost basis at death depends on the situation. Some want the value in their estate, others may not!

There are “NO ONE SIZE FITS ALL” approaches Each plan is based on the set of facts of your Trust NEED AN ATTORNEY TO ASSIST.

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Proposition 13 Trust Irrevocable Trust transfers CA Real Property To Children File Prop 58 “Claim for Reassessment Exclusion Between Parent and

Child” Grantor Trust: Right to Borrow without Adequate Security Grantor controls ability to change the time of income distributions. IRC - 2038 Power - is based on the notion that a power to control another’s

interest in property is a significant attribute of ownership and should therefore be taxed as such at death (IE included in federal taxable estate).

Gift an incomplete gift for Federal Gift/Estate Tax Purposes No Gift Tax Return Children then can capitalize an LLC so that no reassessment until more than

50% passes to other people.

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Estate Tax Exclusion Amount In 2020, the Exclusion Amount is $11.58M per person There will be no “lookback” against this amount once the

exemption is lowered Consider locking in your $11.58M exemption now Basic Exclusion Amount, oldest exemption first so when you

gift $2M it may be deducted from the future exemption (Biden) And California May Impose their Own Estate Tax

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What can I do after 2/15/2021?

Consider purchasing real estate (not a residence) in an entity such as an LLC

Many times, when the owner of an LLC dies, reassessment can be avoided IF the property is originally PURCHASED by the LLC

Michael Dell Maneuver – Fairmont Miramar Hotel, Sept 2006 owned by Ocean Avenue LLP 49 % - Susan Lieberman Dell Sep Prop Trust 42.5 % - MSD Portfolio LP – 99.9% owned by Michael Dell 8.5% - Miramar Hotel Investor, LLC

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PROPERTY PURCHASED IN AN LLC Change in Control/Change of Majority Ownership - This rule applies when a legal entity is the

purchaser of the property. A change in control does not occur unless a single person obtains more than 50% of the voting stock or the capital and profits interests, and a husband and wife’s interests are not attributed to one another. Therefore, a husband and a wife each obtaining 50% of an entity does not result in a change in control. However, some pitfalls to be aware of would be post-death transfers of entity interests. In this same example, if Husband dies and his interest is transferred to Wife, then a change in control will occur.

Change in Ownership- A change in ownership is analyzed when an individual (or entity) transfers real property to an entity. As a general rule, the transfer of any interest in real property to or from a legal entity is a change in ownership and results in reassessment of the property transferred. An exclusion from change in ownership applies for proportional ownership interest transfers of real property between a legal entity and an individual. Thus, if property is transferred between legal entities or between an individual or individuals and a legal entity, and the proportional ownership interests of the transferors and transferees (whether represented by voting stock or capital and profits interests in a partnership or limited liability company) remain the same, then the transfer is excluded from change in ownership and potential reassessment (absent an exclusion). For example, if A and B own real property as tenants in common, each as to 50% interests, and then transfer the property to AB LLC, the property is excluded from change in ownership so long as A and B each own 50% interests in AB LLC.

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RENTAL PROPERTY PURCHASED IN AN LLC You and your spouse purchase a home for $1m

and rent it out Your purchase the home in the LLC. Now, the home is worth $3M.

Your Three children each acquire 33.3% interest in the entity

NO CHANGE OF OWNERSHIP The property MUST have been ACQUIRED

by the LLC, not you and then transferred to the LLC

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RENTAL PROPERTY PURCHASED IN AN LLC You and your spouse purchase a home for $1m and

rent it out Your purchase the home in the LLC. Now, the home is worth $3M.

Your Son acquired 48% of the entity. Your daughter in law acquired 48% of the entity Your grandkids get 4%

NO CHANGE OF OWNERSHIP No one gets over 50%, no change. If someone gets

51%, the entire property gets reassessed. Dell Maneuver – Exception been around for years!

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PROPERTY TRANSFERED INTO AN LLC Ken and Ben and tenant in common owners, 50/50 in a

property in Redondo beach. They transfer the property to KB LLC, they are now

50/50 owners of the LLC No change in ownership, transfer is proportional

ownership transfer. They are Original Co-Owners If Ken transfers 30% to his son and Ben transfers 25%

to his daughter, a 55% change. CHANGE IN OWNERSHIP SINCE MORE THAN

50% OF ORIGINAL CO-OWNER INTEREST HAVE TRANSFERRED.

Parent to child exclusion not applicable because transfer is of LLC interest, not transfer of real estate.

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High Chance of Error Demands Expert AdviceIF you have the slightest question about a transfer of property in a Living Trust or otherwise, we urge you to consult a competent California attorney. Here are just a few examples of the Proposition 13 mistakes people make: You change the title of a house, possibly triggering a reassessment. You name multiple beneficiaries in a Living Trust, which includes your house. Some of the beneficiaries are your children and some are

not. As a result, the possibility of your children avoiding a reassessment may be lost. You move your industrial property into an LLC so you can protect yourself while renting it out, accidentally triggering a reassessment

because you didn’t file the right form on time at the assessor’s office. Without proper planning, when you die you put your beneficiaries into a “race” to claim the $1M exclusion on a commercial property—

since only the first to claim the exclusion may win. Your heirs simply don’t know they have to file a claim for reassessment exclusion under Proposition 13 within three years, and they may

lose it. One parent dies without creating a special trust to preserve their assessment exclusion on properties which are not primary residences.

When the second parent dies, the kids miss out on a $2M exemption, and can only get a $1M exemption from that second parent. A transfer occurs without proper registration with the state—and 20 years later, the new owner owes 20 years of “supplemental” back

taxes at the enormously higher rate. Grandparents don’t realize they can transfer their assessment exclusion to grandchildren—that is, if both parents are deceased and the

grandchild did not receive some other residence from their parents. People think that they are passing on a “principal residence” but they haven’t lived there for years, and the state objects. People think they can pass on the exclusion for a multi-unit property, but they only occupy part of it, and the state objects.

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Proposition 19 AssessmentFor each parcel of California real estate you may wish to transfer to your children, please complete this Self-Assessment to determine whether you should immediately schedule a Prop 19 Consultation: 1. Do you own any California property that was ORIGINALLY purchased by you individually, jointly, by a trust, or

was inherited? (i.e., NOT originally purchased by an LLC, corporation, or similar legal entity.) (For most clients owning California property the answer to this question will be Yes.)

NO: No need for a Prop 19 Consultation YES: Proceed to question 2 2. Are you willing and able to give up control of, access to, and equity in any of your real property during your lifetime? NO: No need for a Prop 19 Consultation YES: Proceed to question 3 3. Do your children wish to retain any of your real property following your death or lifetime transfer of the property? NO: No need for a Prop 19 Consultation YES: Proceed to question 4 4. Is there a significant difference between the current fair market value and the “assessed value” of any of your real property? (The term “significant” is subjective. For example, a difference of $100,000 may result in a property tax increase of approximately $1,100 per year (approximately $11,000 over ten years). A difference of $500,000 may result in a property tax increase of approximately $55,000 over ten years.) NO: No need for a Prop 19 Consultation YES: YOU MAY BENEFIT FROM PROP 19 PLANNING

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Closing thoughts

Proposition 19

1. Effective Dates – 2/16/2021 and 4/1/20212. Principal Residence – Parents3. Principal Residence – Child or Grandchild4. Taxable Value vs Assessed Value5. Million Dollar Exemption6. Elimination of “Other Property Exclusion $1,000,000”7. Increased Portability for persons over age 55 and Natural

Disaster Victims8. Dell Maneuver – Legal Entities9. QPRT and Bypass Trust owning real estate – if you are a

trustee of either, talk to your attorney immediately

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