Key takeaways

• Proposition 13 (1978) set limits on property taxes: a 1% cap on the tax rate, 2% maximum annual increases, and reassessment only when property is sold or new construction is completed. Intergenerational transfer rules came later and were replaced in 2021.
• Proposition 19 (2020) narrowed property-tax breaks on inherited homes but expanded flexibility for older, disabled, and disaster-affected homeowners to transfer their tax base up to three times statewide.
• Gifting a home during life can reduce an estate’s size but may lead to higher taxes for heirs and loss of parental control. Federal gift-tax limits apply.

Proposition 13 capped property taxes but did not create inheritance exclusions. Proposition 19 later narrowed the rules on transfers between parents and children.

For many households in California, a home represents one of their most valuable financial assets. Property tax rules directly affect whether families can keep, transfer, or pass down that asset affordably.

As homeowners age, families often consider transferring property titles to the next generation before death, assuming that a simple deed change will lock in property tax benefits. In reality, state laws contain detailed provisions that determine when property tax assessments are reassessed and when exclusions may apply.

What Proposition 13 established (1978)

Proposition 13, passed in 1978, rolled back assessed property values to 1975–76 levels and capped the property tax rate at 1% of value. It limited annual increases in assessed value to a maximum of 2%. Properties are reassessed to current market value only when sold or when new construction is completed.¹

Parent-child transfer exclusions

Proposition 13 did not create inheritance exclusions—they were added later by Propositions 58 and 193.

• Proposition 58 (1986): Allowed parents to transfer a primary residence to children without reassessment.²
• Proposition 193 (1996): Extended similar benefits to certain grandparent-grandchild transfers. These exclusions remained until Proposition 19 made them inoperative for transfers on or after February 16, 2021.³

How Proposition 19 changed the rules (2020)

Voters approved Proposition 19 on November 3, 2020. Proposition 19 redefined two key aspects of California’s property tax rules:⁴

Inheritance rules (effective February 16, 2021)

• Heirs must make the inherited property their primary residence to keep the parents’ or grandparents’ low tax base.
• Even then, the exclusion is capped: the taxable value can increase if the market value is more than $1,044,586 above the existing tax base for transfers between Feb. 16, 2025, and Feb. 15, 2027.⁵

Base-year value portability (effective April 1, 2021)

• Homeowners over age 55, those with severe disabilities, and victims of wildfires or natural disasters can transfer the assessed value of their primary residence to a new home.
• They can do this up to three times in their lifetime.
• The replacement home can be anywhere in California and may be of greater value, with adjustments made to the taxable base.

Understanding basis rules for inherited vs. gifted property

Carryover basis and step-up basis are two different rules the IRS uses to determine the taxable value (basis) of an asset when it is transferred, either as a gift during life or as an inheritance at death.

Carryover basis when gifting during life

If a home is given away while the owner is alive, the recipient keeps the original purchase price as the “basis.”

• For example: A parent bought a house for $50,000. If the house is worth $700,000 when gifted, the child’s basis is still $50,000.
• If the child sells soon after, they may owe capital gains tax on $650,000.

Step-up basis when inheriting after death

If the same home is inherited at death, the basis usually “steps up” to the current market value.

• For example: If the house is worth $700,000 at death, the heir’s basis is $700,000.
• A quick sale at that value would generate little or no taxable gain.

Federal gift tax rules in 2025

In 2025, the IRS allows individuals to gift up to $19,000 per recipient per year without filing a gift tax return. Married couples can combine their exclusions to gift $38,000 to a single recipient.⁶ If the gift exceeds $19,000 to one person in 2025, the giver must file Form 709. Larger gifts reduce the giver’s lifetime federal estate/gift exemption, which is $13.99 million per person in 2025.⁷

Benefits of gifting a home during life

Helping heirs sooner

Gifting allows children or other heirs to use, live in, or manage the property during the giver’s lifetime, potentially providing housing stability or financial security earlier.

Reducing the size of a taxable estate

Transferring property can lower the overall value of an estate for federal estate tax purposes. In 2025, the federal lifetime estate and gift tax exemption is $13.99 million per person, meaning many families can transfer substantial assets without immediate federal tax.

Potential Medicaid or long-term care planning advantages

In certain cases, transferring a home may factor into Medicaid eligibility planning, though strict federal and state look-back rules apply. This area is complex and requires professional legal guidance.

Risks of gifting a home during life

Loss of parental control

Once a parent gifts the home, it legally belongs to the child. The parent loses the ability to prevent the child from selling, mortgaging, or moving them out.

Exposure to creditors or divorce

If the child faces lawsuits, bankruptcy, or divorce, the home may be subject to claims by creditors or settlements.

Tax complications if sold soon after transfer

Lifetime gifts use carryover basis. If the home is sold quickly, capital gains taxes may be substantial.

Estate planning considerations for California property owners

Both Propositions 13 and 19 have many nuances that must be followed for your strategy to work — it’s always advisable to work with an attorney that practices in this area to help you navigate the complexities.

Individuals should contact their own professional tax advisors or other professional to help answer questions about specific situations or needs prior to taking action based on this information.

FAQs

What did Proposition 13 change about property taxes?

Proposition 13, approved in 1978, rolled back property assessments to 1975–76 levels, capped the general property tax rate at 1% of assessed value, and limited annual increases to 2%. Properties are reassessed at current market value only when sold or newly built.

How did Proposition 19 change inheritance rules?

Proposition 19, passed in 2020, requires children or grandchildren who inherit a family property to use it as their primary residence in order to retain a lower tax base. Even then, the exclusion is capped at the prior taxable value plus an indexed amount — currently $1,044,586 for transfers between February 16, 2025, and February 15, 2027.

What benefits does Proposition 19 give to older or disabled homeowners?

Eligible homeowners — those over age 55, those with severe disabilities, or those affected by natural disasters — may transfer the assessed value of their primary residence to a replacement home. They may do this up to three times in their lifetime, and the replacement home can be anywhere in California.

What is the difference between carryover basis and step-up basis?

If a property is gifted during life, the recipient keeps the original purchase price as the basis (carryover basis). If the property is inherited after death, the basis usually resets to the fair market value at that time (step-up basis), reducing potential capital gains tax if sold.