As of the date of writing this article, California’s Proposition 19 (“Prop 19”) is on track to receive enough votes to pass and be codified into law. Prop 19 significantly changes the rules on reassessment of property passing from parents to children and, in some cases, grandparents to grandchildren, and should be cause for concern for most who own family legacy real property in California.
Prop 19’s effective date is February 16, 2021, so any planning to address Prop 19’s effect should be started as soon as possible.
Under current California law, a parent can transfer a primary residence of unlimited value and up to $1,000,000 of assessed value of non-primary residence property to their children without triggering reassessment of property taxes. Note that this is assessed value, which is generally much lower than fair market value, depending on when the property was purchased. The children must submit a claim for reassessment exclusion to the county assessor in order to keep their parents’ property tax basis. Grandchildren may also benefit from current law when receiving real property from their grandparents if the intervening parent is deceased.
Proposition 19 Changes to Parent-Child Reassessment Exclusion Rules
Under Prop 19, only the transfer of a parent’s primary residence to a child is potentially excluded from reassessment. Transfer of any non-primary residence property will trigger reassessment and the child will pay property taxes based on current fair market value.
The transfer of a primary residence from parent to child is excluded from reassessment if both of the following are true:
- The child claims the homeowner’s exemption for property taxes (i.e., the property becomes the child’s primary residence) within one year of the transfer; AND
- The fair market value of the property is less than the assessed value plus $1,000,000.
If the fair market value of the property is greater than the current assessed value plus $1,000,000, then the property is subject to a partial reassessment for the value greater than assessed value plus $1,000,000.
Mother passed away in 2010 and Father passes away in May 2021, and the only asset, a real property, passes to their only Child, who immediately moves into the real property as Child’s primary residence. At the time of Father’s passing, the property had an assessed value of $500,000 and current fair market value of $1,200,000. No reassessment. Current fair market value of $1,200,000 is less than assessed value of $500,000 plus $1,000,000 (i.e., $1,500,000).
Same facts as above, except Child does not move into the property as her primary residence within one-year of Father’s death. Full reassessment – Child has not claimed homeowner’s exemption.
Same facts as Example 1, except current fair market value is $2,000,000. Partial reassessment. Current fair market value is greater than $1,500,000. New property tax basis is $1,000,000 (current basis of $500,000, plus $2,000,000 fair market value less $1,500,000 exclusion), essentially doubling the amount of property taxes though less than a full reassessment.
The above rules also apply to a transfer from a grandparent to a grandchild if the intervening child is deceased and the child’s spouse is deceased or remarried before the date of the transfer. Note that there are some additional qualification requirements if the grandchild received a primary residence from their deceased parent.