Be careful when transferring real property in California, or your annual property taxes might get reassessed. That’s right! If you transfer real property from an individual to another entity, this changes the ownership of that property. When this occurs, the transfer will trigger a property tax reassessment.
In November 2020, voters approved California Prop 19. This marked a landmark change to Prop 13, which limited property taxes. The new law has financial consequences for children who inherit property from their parents.
California Prop 19 made essential changes to two existing statewide property tax saving programs:
- Replaced Proposition 58 and Proposition 193: the new law limits parent-and-child transfer and grandparent-to-grandchild transfer exclusions.
- Replaced Proposition 60 (1986) and Proposition 90 (1988) programs for home transfer by seniors and Proposition 110 (1990) program for severely disabled persons.
Overview of California Real Property Tax
Every January 1st, County tax assessors must assess all California real estate. The law caps any increase in assessed value at 2 percent of the prior year’s worth. However, in California, the increase in the fair market value of a property is often much higher. The result is homes with a fair market value significantly higher than their assessed value.
For example, supposed a couple purchased a home in California in 1992 for $100,000. The property appreciated significantly over the last 30 years at a rate of 8 percent yearly. That same house is now worth over 1 million in value. However, because the law limits assessed value to a 2 percent increase a year, the couple only pays a tax on the assessed value of just under $200,000. Until California Prop 19 went into law, this was significant savings for them and anyone who inherited the property.
According to Section 60 of the California Revenue and Tax Code, any change in ownership of the property results in the County reassessing the property at current fair market value. This reassessment results in higher property taxes and makes transferring property less desirable for many families.
How Does California Prop 19 Affect Property Taxes?
When Prop 19 passed, it had many benefits for homeowners in California and seniors. Eligible California homeowners can now transfer their tax basis anywhere in the state and are no longer limited to transfers of the same or lesser market value. In addition, Prop 19 increased the times a person can transfer tax assessments. If you are over 55, have severe disabilities, or lost a home in a natural disaster, you can transfer a tax assessment up to three times.
However, the new law also had severe financial consequences for parents wishing to pass down real property to their children. The new law states that any real property passed down from parent to child must result in the reassessment of property tax. This reassessment is for properties not used as principal residences. This limits the parent-child exclusion for tax assessments, resulting in a possible higher property tax.
Before Prop 19 passed, parents could transfer their residence to their children without any new market reassessment of property taxes. Children did not have to use this property as their primary residence. Parents could also transfer secondary properties, such as vacation homes, with up to $1 million of the value exempt from any property tax increase.
Now, the government reassesses property tax with any transfer of real property. Children who inherit property must consider the increase in property taxes when determining whether to keep or sell their newly inherited property.
Exemptions to Reassessment
If you sell your property to a third party, the County automatically reassesses that property. The law does not provide exemptions when selling or transferring property to a third party. But what about transferring property to spouses, joint owners, business entities, and even trusts?
The California Revenue and Tax Code considers married couples and domestic partners to be a single economic unit. Reassessment of property value is not triggered as long as the couple is married during the property transfer.
There are exemptions for property transferred to business entities. The most common is when someone transfers real property to a business in exchange for interests in the business entity. This might not trigger a reassessment.
Likewise, the property is often transferred to a living trust to avoid the expenses and hassles of probate. You can transfer property to a trust and avoid reassessment if you are the present beneficiary and the trust is revocable.
The rules and laws surrounding the transfer of real property are complex and difficult to navigate. An experienced California estate planning attorney can help you protect your property and safeguard your children’s inheritance. Without legal guidance, your beneficiaries might owe excessive property tax fee when they inherit your home. We can help with that!
Looking for an Estate Planning Attorney?
When you purchased your home, you may have envisioned generations living there, surrounded by love and family. Passing down your home might be your legacy and something you’ve worked hard to leave behind. However, the new laws might jeopardize.
Call our Pleasanton estate planning law firm immediately if you have questions about transferring real property in California. We can evaluate your estate and help you make the best choices to protect your assets. We know California laws that might affect your property, inheritance, trusts, etc. We use this knowledge to protect our clients at every turn. Call us today for a consultation and review, or fill out our confidential contact form.
John Park
John Park is a highly experienced attorney in estate planning, probate, business law and guardianship to help people organize the elements of their lives through careful estate planning and asset protection measures.
By John Park Law | Posted on November 28, 2022
