Under the current law, and prior to Proposition 19 (Prop 19), a parent could transfer (a) a primary residence, regardless of value or (b) up to $1 million of assessed value of real property (other than primary residence; such as vacation home, rental property etc.) to their children without a reassessment of property base value. In other words, the property taxes would stay substantially the same after the transfer from parent(s) to children. This law will remain in effect until Feb. 15, 2021.
Future Limitations Due to Prop 19
Prop 19 eliminates the Parent-Child (and Grandparent-Grandchild) Exclusion from reassessment for properties other than a “primary residence.” Meaning unless the child will use the property as his or her primary residence, the exclusion does not apply. Thus, children inheriting property from their parents (other than the primary residence), may see a substantial increase in property taxes on such inherited property.
- Prop 19 limits the exclusion from reassessment for transfers from a parent to a child of $1 million of fair market value, and the child or children must use the property as his or her primary residence within one year of the transfer (and claim the corresponding homeowner’s exemption).
- If the property value exceeds $1 million, it will be partially reassessed but not to full market value (i.e., FMV less $1 million). If the child does not use the home as a primary residence, it will be reassessed at market value.
- Prop 19 is not retroactive and will not apply to any property until it is transferred (or deemed transferred) after Feb. 15, 2021.
The chart below demonstrates a summary of the abovementioned changes:
|Current Law||Proposition 19|
- Principal residence of transferor
- No value limit
- Residence and homesite (excess land may be excluded as "other property"
- Principal residence of transferor and transferee
- Value limit of current taxable value plus $1,000,000 (as annually adjusted)
- Family homes and farms
|Other Real Property|
- Transferor lifetime limit of $1,000,000 of factored base year value
- Eliminates exclusion for other real property other than the principal residence
|Grandparent-Grandchild Middle Generation Limit|
- Parent(s) of grandchild, who qualifies as child(ren) of grandparent, must be deceased on date of transfer
- No change; parent(s) of grandchild, who qualifies as child(ren) of grandparent, must be deceased on date of transfer
- File a claim within 3 years or before transfer to third party
- File for homeowners' exemption within 1 year of transfer
- Revenue and Taxation Code section 63.1 (Implements Propositions 58/193)
Future Prop 19 Benefits
Homeowners who are over 55 years of age, disabled or victims of a wildfire or natural disaster may transfer the assessed value of their California primary residence to a newly purchased or newly constructed replacement primary residence anywhere in California.
- The homeowners may take advantage of the assessed value transfer up to three times during their lifetime.
- The transfer may apply even if the replacement primary residence has a higher FMV than the original primary residence. The excess FMV of the new home will be added to the assessed value of the old home to arrive at the new assessed value for the new home.
Under Prop 60 and Prop 90, transfers of base value are allowed within and between certain counties in California. However, the base value transfer is disallowed completely if the replacement property fair market value (e.g., purchase price) is higher than the original property. Certain exceptions are allowed but only up to 5-percent or 10-percent increase depending on when the replacement property is purchased.
When Will the Prop 19 Be Effective?
The provisions of the Parent-Child (and Grandparent-Grandchild) Exclusion that increase property taxes will go into effect on Feb 16, 2021. While the Base Year Value Transfer for homeowners, who are over 55 years of age, disabled or victims of a wildfire or natural disaster, will be effective from April 1, 2021.
Because of the fast-approaching deadline, property owners who wish to transfer their California real property to their children without property tax reassessment should discuss the current options with their tax advisors in order to take the benefit of this short window. Property owners who have transferred California real property to a Qualified Personal Residence Trust (QPRT) that has not yet terminated should consider his or her current options. Specifically because property held in a QPRT is not protected from Prop 19 if the fixed term ends on or after Feb. 16, 2021.
For homeowners looking to take advantage of moving within California, it may make sense to wait to sell your current property until after the April effective date to take advantage of reduced future property tax. This would be achieved by transferring current property base to a new home and retaining the property tax base value via Prop 19.
- The $1 million Parent-Child Exclusion from reassessment is per parent. As a result, a couple can transfer to their children a total of $2,000,000 of assessed value in real property during the parent’s lifetime (other than primary residence).
- The Federal Estate and Gift Tax Exemption of $11,580,000 per individual is available in 2020. This allows many property owners to gift properties to their children without the imposition of federal gift tax. California does not have a state gift tax.
- The transfer of investment property to their children in an irrevocable trust before Feb. 16, 2021 may seem like a beneficial option for parents in order to get the Parent-Child Exclusion before it expires.
- Notably, the Parent-Child Exclusion rules discussed in this update do not apply to properties held in legal entities such as limited liability companies, partnerships and corporations. There is a separate set of rules for determining when there has been a change in ownership (and thus property tax reassessment) of properties held in legal entities.
- A gift during lifetime will not receive a step-up in basis on the death of the parent. There may be ways to preserve the tax base and the step-up in basis; however, a careful analysis needs to be completed before gifts are made in order to save property taxes (and capital gains taxes).
- The smaller counties are at a large disadvantage regarding services and revenues provided to owners that sell small yet potentially very valuable homes in certain areas of the state and transferring low base values along with construction credits to the smaller counties. Prop 19 creates a financial burden to those counties regarding fees and services.
If you need assistance in understanding the new rules, including benefits and limitations, please contact a GHJ tax advisor with any questions or to discuss how above may affect you or your business.