California law until February 15, 2021 allows a parent to child and grandparent to grandchild transfer of a principal residence to be excluded from property tax reassessment.
Other real property such as non-principal residence homes and commercial real estate can be transferred from parent to child or grandparent to grandchild with a $1,000,000 exemption from reassessment.
Taxpayers have to make sure their claim for Reassessment Exclusion is made on time and that they follow all of the applicable laws.
Prop 19 becomes effective February 16, 2021. The parent to child exclusion will be allowed only for the parent’s principal residence at the time of transfer, such as by gift or death. The current assessed value plus $1,000,000 will be excluded from reassessment after transfer and maintain the parent’s assessed value at date of transfer.
In order to qualify for the exclusion the child must make the property their primary residence right away after the transfer. If at any point in time the child no longer uses the home as a primary residence, they will lose the reassessment exclusion and be subject to reassessment and higher property taxes.
As an example, on February 16, 2021 when Prop 19 goes into effect, a property with an assessed value to the parent of $200,000 is transferred to the child and the fair market value of the personal residence is $2,000,000.
Parent’s property taxes up until February 15, 2021 based on $200,000 assessed value:
x 1.25% (will vary based on local rates)
$2,500 property taxes, parent
A child in this example will maintain the same assessed value of $200,000 plus an exclusion of up to $1,000,000 for property tax purposes after the property is transferred to the child:
Additional assessment after property transfer to child:
$2,000,000 Fair Market Value
Child’s updated property tax assessed value:
Child’s property taxes:
If the parent had transferred the property to the child by February 15, 2021, the child would have saved $10,000 annually:
$12,500 Child’s property taxes on February 16, 2021 or later
- $2,500 Parent’s property taxes until February 15, 2021
Prop 19 will get rid of the parent to child $1,000,000 assessed value exclusion on non-principal residence property. By using the previous example and changing the personal residence to an investment property such as an office building, on February 15, 2021 or earlier, a property with $200,000 assessed value and $2,000,000 fair market value is under the $1,000,000 assessed value exclusion. A parent to child transfer will be executed with no reassessment. The child will pay the $2,500 property taxes annually just as their parent had pre-transfer.
On February 16, 2021, Prop 19 controls and there will be a reassessment to the fair market value on the transfer of the property from the parent to child. The child’s new annual property taxes will be:
x1.25% (will vary based on local rates)
If the property had been transferred on February 15, 2021 or earlier the child would have saved annually:
$25,000 property taxes, Prop 19, February 16, 2021 or later
-$2,500 property taxes, under parent, February 15, 2021 or earlier
Obviously there are significant tax savings if transfers can be entered into by the February 15, 2021 deadline. There are various strategies to use if the transaction can be entered by this date. If unable to meet the deadline, all is not lost. There are different strategies to protect these generational transfers entered into on February 16, 2021 or later when Prop 19 takes effect. Estate tax, gift tax, capital gains tax and other factors should be taken into account as well. Just know that these changes will be coming in a few weeks and families throughout the state of California may be blindsided if they are not planning their estate carefully.