In our pre-election article we discussed two propositions that were on the ballot, Proposition 15 and Proposition 19, that would have raised property taxes for some owners of real property. Prop 15 was defeated, but Prop 19 passed by a slim margin. Prop 19 was a “trick-or-treat” measure, where some property owners received a property tax break, but others faced a property tax increase. The “treat” was that as of April 1, 2021, property owners over 55 years old, disabled, or victims of wildfire or other natural disaster now have three opportunities in their lifetime to carry over the assessed value of their home to a newly purchased or newly constructed home of equal or lesser value in California and avoid higher property taxes. This article will focus on the “trick” aspect of Prop 19 that will eliminate the Prop 58 parent-child (and Prop 193 grandparent-grandchild) property tax reassessment exclusion for owners of property who would like to transfer the property to their children.
Investment Properties and Future Rentals – Act Now
If you own investment property and would like to transfer it to your children without triggering a reassessment, you now have a short window of time to do so before the parent-child property tax reassessment exclusion is abolished. Until February 15, 2021, parents can transfer a primary residence to their children without triggering a property tax reassessment. Properties other than a primary residence, such as a vacation home, rental, or commercial property, can also be transferred from parent to child with the first $1 million of assessed value being exempt from reassessment. Married couples can transfer up to $2 million of assessed value.
Primary Residence – New Rules
On or after February 16, 2021, any transferred property, other than a farm or the parent’s principal residence that is also used as the principal residence by the child, will be reassessed at market value. As long as the child uses the transferred property as his or her principal residence within one year of the transfer, the parent-child exemption will be calculated using a somewhat convoluted formula. If the difference between the fair market value of the property at the time of transfer and the parent’s tax basis is under $1 million, the assessed value will remain the parent’s tax basis. However, if the difference between the fair market value of the property at the time of transfer and the parent’s tax basis is over $1 million, then the assessed value will effectively be the fair market value minus $1 million.
For example, if the parent’s tax basis is $600,000 and the fair market value is $900,000, then the difference between the fair market value and the parent’s tax basis is $300,000, which is less than $1 million, and therefore the assessed value will be the parent’s tax basis ($600,000).
However, if the parent’s tax basis is $600,000 and the fair market value is $2.2 million, then the difference between the fair market value and the parent’s tax basis is $1,600,000, which is over $1 million, and therefore the assessed value is the fair market value ($2.2 million) minus $1 million, which is $1.2 million.
As you can see, the property tax implications can be significant if the property has been owned for a long time and the tax basis is low compared to the fair market value. In determining whether to take advantage of the parent-child exemption while it is still available, it is necessary to evaluate the parent’s and child’s long-term plans for the property. If the child plans to own the property for a long time, then keeping property taxes low may be the best option. On the other hand, if the child plans to sell the property, it might make sense to have the parent keep the property until the income tax basis steps up on death, and the child can save significant capital gains tax on a future sale.
If you or your parents own property and would like guidance on whether to utilize the parent-child property tax reassessment exclusion before it disappears, contact a real estate attorney quickly to determine what needs to be done to accomplish your goals while the exclusion is still an option.
This blog is written as of November 17, 2020. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.
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