California property owners: your wish to transfer your real property interests to a loved one may be eligible for an exclusion!
California real property, assessed by the state’s Board of Equalization, applies various factors when assessing a property’s base value (see California Revenue and Tax Code). Base value determines the total value of the property and is used when determining the percentage of property tax owed. Traditionally, real property was assessed by a cyclical approach (continuously reassessed on a re-occurring timeline), usually subjecting property owners to severe increases in property taxes. As a response to these increases, CA voters approved Proposition 13 in 1978, limiting the state’s ability to tax properties with little to no constraints. Proposition 13 marked an increased protection to property owners by rolling back the market values of real property to a 1975 market rate and limiting the state’s ability to dramatically increase property values. Thereafter, property owners were able keep the base value of their properties at relatively low rates while guaranteeing that any increases in property value could not exceed 2%, per annum.
However, certain events surrounding property ownership may “trigger” a change in property status and subsequently, minimize those protections afforded by Proposition 13. Change of ownership (sale, transfer, added interest) is one event that may trigger reassessment of the property, at current market rates. Valid changes of ownership require that the existing property be reassessed, removing the 2% cap, subjecting the property to the fair-market value at the time of the change of ownership. The likely result? Much higher base values and thus, higher tax burdens for new property owners.
So, what happens when one inherits a whole or partial interest in a property (i.e. triggering change of ownership)? Ordinarily, this is a triggering event. The policy behind this being that the beneficiary (new owner) receiving the property interest, economically benefits from the inheritance and thus should be responsible for the taxes associated with that economic benefit. However, under Propositions 58 and 193, a parent-to-child (58) or grandparent-to-grandchild transfer (193) excludes the transfer from triggering reappraisal of the property. The transfer exclusion applies, (1) if the transfer is a primary residence (no value limit), or (2) if the property is not a primary residence, transfers of the first $1 million of real property (applies to each transferor). Under this exclusion, beneficiaries may inherit or receive property without the property being reassessed. Meaning, that real property, transferred from parent to a child, is only subject to the base value appraised at the time of the last triggering event with only a 2% increase in taxable property value, annually. Additionally, the property may be transferred via inter-vivos (the transferor may still be alive when the transfer is made to the child/grand-child) or testamentary (after death). When distributed through a trust, the state looks to beneficiary named in the trust document. Keep in mind, that this only applies in a direct transfer from parent (grand-parent) to child (grand-child); once the property is sold to another party, reassessment is triggered. This tax exclusion gives major relief to those fa