Do you own California real property that you want to pass to your children via your Will or Trust on your death? Changes in the law, taking effect on February 16, 2021, may result in a reassessment of property taxes on the real property your children inherit on your death.
Since 1978, California homeowners have benefitted from Proposition 13, which has essentially allowed homeowners to maintain their tax bases for property tax purposes.
Since 1986, Proposition 58 (California Revenue & Taxation Code § 63.1) has allowed homeowners to transfer their principal residence, no matter the value, and other real property valued up to $1,000,000 to their children without reassessment through what is commonly known as the Parent-Child Transfer Exclusion. That is about to change. Among other things, Proposition 19, which recently passed with 51% of the vote:
- Repeals § 63.1 Parent-Child Exclusion for most real property transfers;
- Eliminates Prop. 58 Parent-Child Exclusion for all real property other than parents’ principal residence when used as child’s principal residence; and
- Requires that inherited homes that are not used as principal residences, such as second homes or rentals, be reassessed at market value at transfer date.
If you own a home that you want to pass to your children upon your death, it may no longer qualify for a Parent-Child Exclusion, unless it is your primary residence; your child intends to use it as their primary residence; AND the fair market value of the home is less than $1,000,000 on your date of death.
Even if you are leaving your primary residence, with a value of less than $1,000,000, it becomes even more complicated if you have more than one child. If you have more than one child, and only one of your children intends to occupy your residence as their own, it could still be subject to reassessment for any shares transferred to the non-occupant child(ren).
Under Proposition 19, if you own investment property it will be reassessed upon your death or in the event of a transfer to your child during your lifetime. If you own California real property that you want to pass to your children, without risk of reassessment, you have until February 15, 2021 to record a Deed transferring real property to your children and take advantage of the Parent-Child Exclusion and the all-time high lifetime gift exemption amount, but unfortunately even those are not without risks of other tax implications, such as capital gains tax.
For some, the option of gifting your real property now and avoiding reassessment may be the best solution. For others, having your property subject to reassessment on your death with your children avoiding capital gains tax may be a better option. There is no “one size fits all” solution to this problem. You need to consult your estate planning attorney and a qualified Certified Public Accountant to weigh the pros and cons and determine what solution works best for you and your family.
Remember you only have until February 15, 2021 to take advantage of the existing Parent-Child Exclusion. However, since the Recorder’s offices have been closed to the public to the COVID-19 closures, all recordings are being done by mail, which further limits the time to take advantage of the existing the Parent-Child Exclusion.
If you have questions about how Proposition 19 impacts your estate plan, please contact Cannon Legal Firm today. We proudly serve Seal Beach, Long Beach and the surrounding communities for all your Estate Planning, Trust & Estate Litigation, Trust Administration and Probate needs.