California voters recently approved Proposition 19, which may significantly increase property taxes when real property is transferred between a parent and child. This Client Alert explains the changes to current law and what to consider in deciding whether to take action before the new law takes effect on February 16, 2021.
Current Law Regarding Parent-Child Transfers
Under current law, a parent can transfer their principal residence to a child without a property tax reassessment, regardless of whether or not the child chooses to use the property as the child’s own principal residence. In addition, each parent can transfer up to $1 million of assessed value of other real property (e.g., vacation homes, commercial properties or agricultural property) to their children without a property tax reassessment. Together, two parents can transfer up to $2 million of assessed value of other real property to their children without reassessment. These reassessment exclusions apply whether the parent-child transfer occurs by sale or by gift during the parent’s lifetime, or by transfer following the parent’s death.
Changes under Proposition 19
Prop. 19 will significantly limit the ways a parent-child transfer of real property can be excluded from property tax reassessment. Only two types of transfers will be eligible for exclusion from reassessment on or after February 16, 2021:
- A transfer of the parent’s principal residence to a child who uses the property as their own principal residence after the transfer; and
- The transfer of a family farm.
These two exclusions have value limits as well. The maximum value that can be excluded from reassessment is the current assessed value of the property plus $1 million. To the extent that the fair market value of the property exceeds the current assessed value plus $1 million, the excess will be reassessed. If the property’s fair market value at the time of transfer is less than $1 million more than the current assessed value, the property will receive a complete exclusion from reassessment for property tax purposes.
Consider Lifetime Transfers before February 16, 2021
If you own real property with a low assessed value in comparison to its fair market value and if your children are the beneficiaries of your estate plan, you should consider taking action before February 16 to minimize property taxes in the future by (1) making lifetime transfers, whether by gift or sale, (2) by using an entity such as a limited liability company (“LLC”) to hold the property, or (3) both lifetime transfers and using an entity.
Boutin Jones has a team of attorneys who are able to adjust your estate plan to this changing landscape. If you want to discuss your options in more detail with one of our attorneys, contact us before Proposition 19 takes effect on February 16, 2021.
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