By Craig W. Anderson
Farm advocates see Proposition 19 as bad news for agriculture. The full name of the proposition is “The Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act of 2020”and it was passed by California voters last November.
According to Robert Spiegel, policy advocate for California Farm Bureau Federation, Proposition 19 affects taxes on homes and inherited property “and poses significant challenges for family farms and ranchers as state agencies implement the new measure. CFBF has been the only agricultural organization challenging [the] interpretations and guidance the agencies have been using.”
Prop. 19 squeezed into law by the voters in the November 2020 election via a 51% to 49% margin, initiated the rush on farm and ranch estate planning. Before its official start date of Feb. 16, 2021, the proposition created significant tax changes for the state’s property owners.
It expands the ability of certain persons to preserve and transfer the assessed value of their primary residence to a replacement primary residence and severely limits the conditions under which other property owners can transfer California residential and/or commercial real property to their children/grandchildren without triggering a property tax reassessment.
Under Prop. 19, most properties can be reassessed at current market value when they pass to heirs. Despite buffers in the law, the lack of profitability of such farms means any alignment of property taxes with current market values would be a death sentence, said CFBF policy advocate Robert Spiegel.
All of which means that without Prop. 19, parents could transfer certain real property to children without a property tax reassessment. But now, the proposition could negatively impact parents’ ability to pass along the family farm and ranch to their children.
“Proposition 19 is a con that needed clever and false catch phrases to fool voters into thinking it was a good idea,” said Kenny Watkins, Linden cattle rancher and diversified farmer. “It’s a big loser for ag landowners. Its intention is to generate more taxes from landowners to pay for other programs.”
Proposition 19 caused a major change to Prop. 13 the 1978 law limiting property taxes, it creates severe financial challenges for children inheriting property from their parents and, as much as can be determined after digging through its murky language and definitions, it eliminated certain family exclusions and could be particularly costly for multigenerational farm families that have paid affordable tax rates based on the original price of the property.
“We knew Proposition 19 would present problems,” said San Joaquin Farm Bureau Executive Director Bruce Blodgett. “It too bad voters were lured into voting for something like this without realizing what a bad law it is.”
He added, “I’m not surprised this was so completely bad for agriculture. Farm Bureau’s trying to keep farms and ranchers in business and viable and now this.”
“So far, Proposition 19 implementation is clear as mud and property owners urgently need clarification from the state Board of Equalization (BOE),” Spiegel wrote in a policy statement for Ag Alert. “New guidance will be provided to county assessors and we expect legislative efforts will occur in 2021. Additionally, Proposition 19 will likely face multiple legal challenges from California property owners.” Letters from the State Board of Equalization to assessors have sounded alarms about the state’s interpretation of the murky and confusing language.
As early as December 2020, David Yeung, deputy director, Property Tax Department of the BOE, wrote in a six page explanatory letter to county assessors – an LTA or Letter to Assessors – “Conclusion. At this time, there are still many uncertainties surrounding the implementation of Proposition 19, as the language does not address all issues. These issues will need to be resolved through future legislation.”
This sloppy legislation is typical, and all too common: a bad bill with murky language requires repair legislation further down the bumpy legislative road.
Yeung continued: “Once this implementing legislation has been enacted, we will issue future guidance on the matter. Until that time, it is recommend that county assessors track possible qualifying transfers, since it is likely that the implementing legislation will be retroactive to the applicable operative dates.”
The theory seems to be: Begin cleaning up Prop. 19 now and don’t tell the voters the truth about it.
“Get it written, don’t worry about the quality or accuracy of the bill, get it passed using a duplicitous campaign and work on it later, after it’s law, to repair what should have been right in the first place,” said Ken Vogel, SJFB first vice president. “Bad legislation like Prop 19 threatens the food supply of America and it’s designed to be a redistribution of wealth. It is disruptive and damaging to agriculture.”
Prop 19 is, he said, representative of the old adage, slightly modified: “The only certainties are,” Vogel said, “Death, taxes and regulations.”
“I didn’t support it,” said Lodi Real Estate Broker Nick Bokides. “The proposition was promoted with good intentions that didn’t work out. What did happen was that it was good for some people but not good at all for agriculture. Now it’s more difficult to transfer ag property to heirs.”
Bokides commented that the “wildfire relief section of the proposition appealed to voters and tugged at their heartstrings, helping it get passed while not revealing the real adverse effect on agriculture.”
An example of the BOE’s explanation of how a transfer of property works: “If the fair market value is equal to or more than the sum of the factored base year value plus $1 million, an amount equal to the fair market value of the family home – or the family farm – minus the sum of the factored base year value plus $1 million – is added to the original base year value of the transferred property.”
Spiegel notes that Farm Bureau members should be aware that if the family farm were treated as all other real property under Proposition 19 for example, the taxes paid upon transfer of the property would be based on the actual fair market value of the farm – in this example, $1,750,000 – and the child would pay, due to Prop. 19, $17,500 in new property taxes, instead of $7,500.
Spiegel said: “Many questions remain related to Proposition 19. Farm Bureau members looking to pass along their farm or personal residence should seek advice immediately from those familiar with estate and intergenerational transfers.”
The difference provided by Prop. 19 prompted SJFB President David Strecker to remark, “Anything with different propositions and rules about changing how taxes are paid at the state and federal levels makes everything more complex and costly. We’d like to see governments take positive steps to help farmers and ranchers profit from, and enjoy, their success.”
Of course, that works only if the government promoting its own regulations actually understands them.