Proposition 19 and Investment Real Estate: Financial Tradeoffs and Wealth Planning (Part 2)
Introduction
For California families with rental, commercial, or vacation real estate, Proposition 19 has introduced a costly new challenge: all such properties are now subject to full reassessment upon transfer, whether during life or at death.
This article (Part 2) focuses on investment properties and explains why real estate that once provided generational wealth can now become a tax burden without proactive, multidisciplinary planning.
Repeal of the $1 Million Exclusion
Before Prop 19, parents could transfer up to $1 million in assessed value of non-primary residence real estate to children without reassessment. That exclusion no longer exists.
Today:
- Any lifetime gift, inheritance, or transfer to a trust of an investment property triggers full property tax reassessment to fair market value.
- This means dramatically higher annual property taxes, regardless of whether the recipient is a family member.
Example: The Duplex That Doubled in Taxes
Let's consider a Los Angeles duplex:
- Assessed value: $600,000
- Market value: $2.4 million
After transfer:
- New assessed value: $2.4 million
- Annual property tax: ~$28,800 (vs. $7,200 before)
Even if monthly rental income is $6,000, the steep increase in property taxes—along with maintenance, insurance, and potential vacancy—may leave little to no net income.
The Financial Planning Angle: Sell or Hold?
We've collaborated with numerous financial planners who help clients run side-by-side comparisons:
Option 1: Hold Property Post-Transfer
- Children inherit with stepped-up basis (for income tax), but reassessed for property tax
- Lower rental yield due to higher expenses
- Ongoing management, legal, and repair duties
Option 2: Sell Property During Lifetime
- Pay capital gains tax on appreciation
- Reinvest proceeds in conservative, diversified assets (e.g., dividend stocks, bonds, structured income portfolios)
- Create liquidity for estate and income flexibility for heirs
The better option depends on age, tax bracket, family goals, and investment horizon.
Fiduciary Concerns: Real Estate-Rich, Cash-Poor Estates
We've spoken with many private fiduciaries who now decline to manage estates dominated by real estate. Why?
- There's often no liquidity to pay taxes or repairs
- They may have to evict a beneficiary or tenant if the property becomes unaffordable
- This creates ethical, emotional, and legal risk
Planning ahead can prevent fiduciary gridlock—and heartbreak for surviving family members.
Final Word: Not a Do-It-Yourself Exercise
While some may search for loopholes, the reality is that Prop 19 requires artfully crafted, multi-disciplinary strategies. There's no "one-size-fits-all" template.
Many planning structures—LLCs, irrevocable trusts, co-ownership deeds—can trigger reassessment if not meticulously designed. Others raise capital gains, gift tax, or liquidity concerns.
The law is far more nuanced than it seems. A thoughtful plan demands coordination between attorneys, CPAs, and financial advisors—and a deep understanding of each family's unique needs.
This article was last updated on June 9, 2025, reflecting current Proposition 19 requirements and planning strategies.