California’s Proposition 19, effective February 16, 2021, introduced significant changes to property tax reassessment rules, particularly affecting transfers between parents and children. To avoid property tax increases due to reassessment under this proposition, it’s essential to understand the new regulations and plan accordingly.
Understanding Proposition 19
Changes Under Proposition 19:
- Prior Law (Propositions 58 and 193):
- Parents could transfer their primary residence of any value to their children without triggering reassessment.
- Additionally, parents could transfer up to $1 million of assessed value of other properties (e.g., second homes, rental properties) without reassessment.
- Current Law (Proposition 19):
- Primary Residence Requirement: The transferred property must be the parent’s principal residence and must become the child’s principal residence within one year of the transfer.
- Value Limit: The exclusion from reassessment applies only up to the parent’s assessed value plus $1 million. Any excess market value above this limit is subject to reassessment.
- Elimination of Exclusion for Other Properties: The previous $1 million exclusion for non-primary residences (like rental or commercial properties) has been eliminated.
Authoritative Source:
- California State Board of Equalization (BOE) – Proposition 19 Overview
Strategies to Avoid Reassessment
- Transfer the Property as a Primary Residence
Requirements:- Parent’s Principal Residence: The property must have been the parent’s primary residence at the time of transfer.
- Child’s Principal Residence: The child must make the property their principal residence within one year of the transfer.
- Action Steps:
- File for the Homeowners’ Exemption: The child should apply for the Homeowners’ Exemption to demonstrate that the property is their principal residence.
- Authoritative Source:
- Understand the $1 Million Exclusion Limit
Explanation:- The exclusion from reassessment applies to the assessed value plus up to $1 million of the market value exceeding the assessed value.
- Any market value beyond this threshold is subject to reassessment.
- Action Steps:
- Assess Property Values: Obtain a professional appraisal to understand the property’s current market value.
- Calculate Potential Tax Impact: Compare the assessed value plus $1 million to the market value to determine if reassessment will occur.
- Authoritative Source:
- Use Trusts Strategically
Types of Trusts:- Revocable Living Trusts: Generally do not prevent reassessment upon transfer unless other exclusions apply.
- Irrevocable Trusts: May provide opportunities to avoid reassessment if structured properly.
- Action Steps:
- Consult an Attorney: Work with a qualified estate planning attorney to structure the trust in a way that meets Prop 19 requirements.
- Ensure Compliance: The trust must explicitly state that the property is to be used as the beneficiary’s principal residence.
- Authoritative Source:
- Explore Co-Ownership Options
Joint Tenancy and Tenancy in Common:- Adding a child as a joint tenant may avoid reassessment on the initial transfer but could trigger reassessment upon the parent’s death.
- Tenancy in common allows for proportional ownership interests.
- Action Steps:
- Evaluate Ownership Structures: Understand the implications of each co-ownership type.
- Seek Legal Advice: Ensure that any changes align with Prop 19 requirements and do not inadvertently trigger reassessment.
- Authoritative Source:
- Consider Lifetime Transfers with Care
Gifting Property:- Transferring property during the parent’s lifetime could avoid reassessment if the child meets the primary residence requirement.
- Be mindful of gift tax implications and the potential loss of the stepped-up basis for capital gains tax purposes.
- Action Steps:
- Analyze Tax Consequences: Consult with a tax professional to weigh the benefits and drawbacks.
- File Appropriate Forms: Ensure all necessary gift tax returns are filed if the value exceeds the annual exclusion.
- Authoritative Source:
- Utilize Family Farms Provision
Eligibility:- The property must meet the definition of a family farm.
- The child must continue to operate the property as a family farm.
- Action Steps:
- Verify Classification: Confirm with the county assessor that the property qualifies.
- Maintain Agricultural Use: Continue farming operations to satisfy the requirements.
- Authoritative Source:
Important Considerations
- Filing Requirements
- Claim for Exclusion: File Form BOE-19-P (Claim for Reassessment Exclusion for Transfer Between Parent and Child) within three years of the transfer or prior to the transfer of the property to a third party, whichever is earlier.
Authoritative Source:
Deadlines and Compliance
- Timely Action: Delays in meeting residency requirements or filing claims can result in reassessment.
- Documentation: Maintain records proving the property’s use as a principal residence.
Potential Tax Implications
- Capital Gains Tax:
- Stepped-Up Basis: Inheritances typically receive a stepped-up basis to fair market value at the time of death.
- Gifting: Lifetime transfers may forfeit the stepped-up basis, leading to higher capital gains tax upon sale.
Authoritative Source:
Consult Professionals
Due to the complexities of Prop 19 and potential unintended consequences:
- Certified Public Accountant (CPA): For tax planning and understanding financial implications.
- Estate Planning Attorney: To structure transfers and trusts appropriately.
- Real Estate Attorney: For property law matters and compliance with state regulations.
Summary of Action Steps
- Determine Eligibility:
- Ensure the property qualifies as a principal residence or family farm.
- Confirm the child can and will establish the property as their primary residence.
- Assess Property Values:
- Obtain a current appraisal.
- Calculate potential reassessment amounts.
- File Necessary Documentation:
- Submit the Claim for Reassessment Exclusion form timely.
- Apply for the Homeowners’ Exemption.
- Consider Tax Implications:
- Analyze potential gift tax and capital gains tax consequences.
- Weigh the benefits of lifetime transfers versus inheritance.
- Seek Professional Guidance:
- Engage with CPAs, attorneys, and real estate professionals.
Disclaimer: The information provided is for general informational purposes and should not be considered legal or tax advice. Tax laws are complex and subject to change. For advice specific to your situation, consult a qualified tax professional or refer to official IRS resources.