As you may or may not be aware, the rules for transfers of inherited property will begin on February 16, 2021. There are a lot of things to consider even before this new law is enacted. We’ve received information from a financial advisor, one of our closest mortgage professionals, and a tax attorney to get you all the information you need to make the best-informed decision when it comes to this change.
Jeffrey D. Stanga, CFP®
Certified Financial Planner
Financial Management Network, Inc.
Proposition 13 property tax basis transfers:
Current law allows individuals over 55 to transfer the property tax basis of their principal residence to a new principal residence of equal or lesser value. This transfer is currently limited to participating counties and can be used only once.
Proposition 19 expands current law from onetime transfers to three-lifetime transfers. Property tax basis transfers can now be done statewide and include homes of greater value. If you buy a home of greater value, you will receive a “blended” property tax rate.
For example, a property with a 1 million dollar market value and a property tax basis, or assessed value, of $500,000 could be sold and transferred to a new 2 million dollar property. The new property’s assessed value would be $1,500,000 for property tax purposes rather than the purchase price of $2 million.
Proposition 19 also allows disabled homeowners and those who lost their homes to wildfires, other natural disasters, or waste contamination to use these benefits as well, regardless of age.
Current law allows parents to transfer the property tax basis of their principal residence to their children during their lifetime or upon their demise with no “use limitations” for the child or “value limitations”. Parents can also transfer up to $1 million of assessed value (per transferor) of Non principal residences to their children without triggering a property tax reassessment for the child.
Proposition 19 limits the parent’s ability to leave their principal residence to their children by imposing “use” and “value” limitations.
The child must use the inherited property as their principal residence. If the child uses the property as a second home or investment property, the property will receive a property tax reassessment to the current market value. Proposition 19 eliminates the unlimited value transfer of principal residence to a child.
If the Market Value/Assessed Value is Greater Than $1 Million, the child’s property tax basis will be the current market value.
If Market Value/Assessed Value is Less Than $1 Million, the child will receive the parent’s property tax basis.
Proposition 19 eliminates the $1 million lifetime non-principal residence exclusion.
How does this impact my family?
Have you previously taken advantage of the 55+ property tax basis transfer?
Effective 2/15/2021, you will be eligible for additional transfers under Proposition 19.
Is your home currently owned by a Qualified Personal Residence Trust (QPRT) whose term will expire after 2/15/2021?
You have till 2/15/2021 to decide to keep the QPRT or remove the property from the QPRT to utilize the current Parent Child Exemption.
You have until 2/15/2021 to implement a strategy to avoid use and value limitations if:
The Market Value/Assessed Value of your principal residence greater than $1 million, you want to leave your principal residence to your children, you have investment or vacation properties with an assessed value under $1 million that you would like to leave to your children.
What should I do?
Contact your FMN Advisor to discuss your situation and family goals.
A Potential solution would be to create a Parent Child Exemption Trust (the “PCE Trust”). This would be beneficial for parents who wish to maintain all of the current benefits associated with their real estate (whether a California primary residence, vacation home, residential rental, or commercial property) while at the same time ensuring their children receive their property tax basis in the real estate.
- Parents Maintain their property tax deductions, rental income, use, and control of the property
- Parents property tax rates have been locked in for the future generation
- Children can use inherited primary residence as a rental or second home with no property tax reassessment
- Upon the parents passing, the property is still eligible to receive a full step-up in basis for income tax proposes, and the PCE Trust is a grantor trust, so no separate tax return needs to be filed each year.
Senior Vice President/Area Manager
Fairway Mortgage / NMLS 118768
With the approval of California’s Proposition 19, the ability to transfer your home or other real property to your children without property tax reassessment will be significantly reduced. The new law will apply to all transfers of real property on or after February 16, 2021.
Under current law (until February 16, 2021), the assessed value of real property increases by no more than 2% annually. Since the fair market value of California real property has far exceeded the 2% annual adjustment since Proposition 13, long time owners of California real property enjoy a lower property tax burden compared to owners of newly acquired property. However, when you transfer (gift or sell) real property, the property is reassessed at the current fair market value. California provides two important exemptions from reassessment when transferring real property between parents and children.
Exemption No. 1: A transfer of a parent’s principal residence to a child is completely exempted from reassessment. The child succeeds to the parent’s assessed value regardless of the value of the property or its assessed value at the time of transfer. It also does not matter whether the child decides to use the home as his or her primary residence, a vacation home, or as a rental.
Exemption No. 2: Transfers of other real property interests (residential or commercial) of up to $1 million of total taxable value are exempted from reassessment, regardless of the fair market value of the property at the time of transfer. This $1 million exemption is per transferor/spouse.
New Law Under Proposition 19
Proposition 19 completely eliminates Exemption No. 2. Parents will no longer be able to transfer real property that is not their primary residence to their children without reassessment. If you have a vacation home or rental property, they will be reassessed at the time of transfer to your children. There are different rules for LLCs.
Proposition 19 also limits the use of Exemption No. 1.
First, only a transfer of the parent’s principal residence to the child where the property continues as the child’s principal residence qualifies.
Second, provided the transfer meets the principal residence requirements, the child’s taxable value is then determined based upon whether the property’s assessed value (fair market value) at the time of transfer is greater than the parent’s taxable value by more than $1 million. If the property’s assessed value at the time of the transfer exceeds the parent’s taxable value by less than $1 million, then the child assumes the parent’s current taxable value. Suppose the property’s assessed value at the time of the transfer exceeds the parent’s taxable value by more than $1 million. In that case, the child’s taxable value is the current assessed value of the property less than $1 million.
Example: Taxable value is $500,000 at the time of transfer. The assessed value (fair market value) is $2.2 million at the time of transfer. Since the assessed value is more than a million dollars greater than the taxable value ($2,200,000 – $500,000 = $1,700,000), the property will be reassessed. The new taxable value will be $1.2 million ($2.2 million less $1 million).
Planning Opportunities Before February 16, 2021
The law does not go into effect until February 16, 2021. This leaves little time to plan; however, there is an opportunity to transfer assets before February 16.
Who should plan?
If you have a second home, rental real estate, or commercial property, you should seriously consider the transfer of those properties to trusts for your children now. You can transfer up to $1 million of property at its taxable value (the value shown on the property tax roll) to trusts for your children without reassessment.
There is concern that the estate tax exemption could come down significantly under a Biden presidency. By transferring the assets now, the property is excluded from your estate for estate tax purposes. Also, by transferring the property in trust now, you could provide asset protection for you and your children.
What do you give up?
If the property is income-producing, the income will be attributed to your child. Also, the transfer of the property will result in a carryover basis. Carryover basis means that your cost basis in the property will transfer to your child. Although this is not ideal, you can control when the property is sold; you can’t control when you pass away. Moreover, the laws allowing for a step-up in basis at death may change soon and eliminate any benefit to keeping the property until your passing.
Many of you own your rental property in LLCs. Depending on how you acquired the property, the LLC transfer to your children could also cause a property tax reassessment. Long story short, if you purchased the property in your name and then later transferred it to an LLC, the property will be reassessed upon your passing. There are still opportunities to eliminate reassessment in this situation.
When should you plan?
Now! We only have a couple of months to prepare plans and complete the transfers.
Robin S. Bentler
Bentler Mulder, llp
Proposition 13 limited the property tax we pay on our real estate. We pay property tax equal to roughly 1.2% of the “assessed basis” of real estate. Assessed basis is typically what we paid for the property with small annual increases. As a result of Proposition 13, we spend far less property tax on real estate we have owned for a long time than we would if it was fully assessed at current fair market value.
Proposition 58 allowed us to transfer much of our real estate to our children and enabled our children to preserve our lower property tax assessed basis.
Proposition 19 effectively gutted Proposition 58 and our ability to transfer our lower property tax assessed basis to our children. There is a small exception for a principal residence.
Proposition 19 becomes effective on February 16, 2021.
Some planning options may be implemented before February 16, 2021, that may enable you to lock-in and preserve your lower property tax for your children. Most of us are not good candidates for this planning. The following are some considerations to help you determine if you, or a client, are a good candidate:
- Low Property Tax – Property tax assessed basis should be low relative to fair market value. Practically speaking, if the assessed basis is more than $1 million less than the property’s current fair market value, the benefit is likely significant enough.
- Age – Property tax will not increase so long as you are alive and you retain your property. Property tax will increase at the death when property passes to children. Practically speaking, if you anticipate properties will pass to children sometime in the next 10 or 20 years, the benefit is likely proximate enough in time.
- Retain Properties – Will your children retain the properties you transfer to them? If children are likely to sell the properties, maintaining a lower property tax assessed basis will have limited value.
For the comprehensive review of proposition 19 visit:
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.