In November California voted on Proposition 19. It may have been a bit confusing but we wanted to address how it impacts Estate Planning.
Proposition 19 ends or significantly limits the exclusion from property tax reassessment for transfers between a parent and a child in three material ways.
- The exemption from reassessment for up to $1 million of assessed value of property other than a principal residence is gone.
- The transfer of a personal residence from a parent to a child will result in reassessment of the property unless the child occupies the property as the child’s own principal residence within 12 months of the transfer date.
- The child must file a Homeowners Exemption in order prove they are residing in the home.
- Even if the child occupies the property, the property tax reassessment exclusion is limited. If the property’s fair market value at the time of transfer is less than $1 million greater than its assessed value, the property will retain its original assessed value. If the property is worth more than $1 million over the assessed value, only $1 million is excluded from property tax reassessment.
For example, under Proposition 19, if a property passes from a parent to a child with an assessed value of $500,000 and a fair market value of $2,000,000, then the new reassessed value for the child will be $1,000,000 which would raise the property tax from roughly $3,500 to $10,000 based on county averages.
The new limited parent-child exclusion rules from property tax reassessment under Proposition 19 becomes effective on February 16, 2021. If you are contemplating a transfer of your real estate to the next generation, the time to plan is now. Do not wait. If you transfer real estate prior to February 16, 2021, you can lock-in the current parent-child exclusions from property tax reassessment. That said, there are a number of things to consider before making such transfers. Most importantly, the loss of a stepped-up cost basis at death for income tax purposes will occur if you transfer the real estate without retaining certain “strings” to cause the property to be included in your estate for estate tax purposes.
Current law provides generous exclusions from property tax reassessment for transfer of a personal residence and other real estate between a parent and a child under current California law, certain transfers of real estate between a parent and a child are not subject to property tax reassessment; namely, during lifetime or at death, a parent may (i) transfer a personal residence of unlimited value to a child without property tax reassessment, and (ii) transfer an additional $1 million of assessed value of other real estate to a child without property tax reassessment. Since the assessed value of real estate – the value shown on the property tax bill – is often significantly less than the fair market value, this exemption from reassessment is a powerful tool for parents to pass personal residences and other real estate with low assessed values to their children with no property tax reassessment.
We understand this is extremely confusing and there are many rules and restrictions. Our current law is changing drastically. New information comes to light almost daily. Please give our office a call 818.887.9401