California Property Tax Changes to Parent-Child Exclusion
Recently passed Proposition 19 will seriously limit the ability to transfer California real property to a child without causing a reassessment and higher property taxes. The new law takes effect February 16, 2021, so if you want to and are able to take steps to preserve this benefit it is important that you act immediately.
Because real property in California is not reassessed except on a change in ownership, many California properties are assessed for property tax purposes at values far below their actual market value. Current law provides two ways in which a parent can transfer real property to a child without causing a reassessment that will increase the property taxes on the transferred property. (A child can also transfer property to a parent using these exclusions.)
A parent can transfer his or her primary residence to a child or children without reassessment. There is no limit on the value of the home that can be transferred. The children can live in the home, use it as a vacation home, or rent it.
A parent can transfer up to $1,000,000 of California real property other than a primary residence to a child or children without reassessment. If the assessed value (not the market value) of the property is $1,000,000 or less, there will be no reassessment when the property is transferred to children. If the assessed value of the property is more than $1,000,000, the first $1,000,000 of assessed value can be transferred without change, and only the balance will be reassessed. For example, if the property is currently assessed at $1,500,000 and is worth $6,000,000, 2/3 of the assessed value ($1,000,000/$1,500,000) will be retained, and 1/3 of the property will be reassessed to $2,000,000 (1/3 x $6,000,000). The children’s new assessed value for property tax purposes will be $3,000,000, not the full $6,000,000.
When Proposition 19 takes effect, two new limits will apply to the transfer of the parent’s primary residence.
The parent-child exclusion can only be used if the transferee child also uses the home as the child’s primary residence, and files for the homeowner’s exemption for the property. The parent-child exclusion will not be available if the home is used as a vacation home or is rented out by the children. If the home is transferred to more than one child, they would all have to live together in the home as their primary.
The parent can only shelter $1,000,000 of increased value from reassessment. Any appreciation above that will be added to the property tax assessed For example, if the primary residence is currently assessed at $500,000 but is worth $1,500,000, the child receiving the home and using it as the child’s primary residence will keep the same property tax assessed value of $500,000. But if the home is worth $3,000,000 instead of only $1,500,000, the $2,500,000 of appreciation will result in an added $1,500,000 assessment; the child’s new property tax assessed value will be $2,000,000 ($500,000 current property tax assessed value + $1,500,000 of “excess” appreciation). This new limitation also applies to a family farm.
Proposition 19 eliminates the second current alternative completely. After February 15, 2021, there will no longer be any parent-child exclusion for a transfer of California real property other than the parent’s primary residence and a family farm.
These new rules will apply to any transfer of California real property after February 15, 2021, whether by a lifetime gift or a transfer at death. They also will apply to any irrevocable trust (such as a Qualified Personal Residence Trust or a trust created for your benefit by a predeceased spouse) that owns California real property and that will pass to your children from that trust in the future. So if it is important to you to keep a current low assessed value and low property taxes for your children when you transfer real property to them, you should consider whether you want to transfer a property now to take advantage of the current parent-child exclusion. Any current transfer would involve many factors besides property taxes, and you should consult your estate planning attorney promptly to discuss what options might be available to you.