In November 2020, California voters approved Proposition 19, which expands special property tax rules for certain homeowners, including those who are over 55 or severely disabled, or whose property has been impacted by a natural disaster or contamination.
The new special rules will allow existing homeowners to sell their current homes, move to a different home anywhere in California, and keep the lower tax basis from their prior home (albeit with some limitations if the eligible homeowner purchases a more expensive home).
However, starting February 16, 2021, Prop. 19 also narrows the rules currently available for inherited or gifted properties. Until that date, properties can still be passed between parents and children (or grandparents and grandchildren, if the grandchildren’s parents are deceased) without an increase in the property tax bill, regardless of whether the child or grandchild uses the property as their residence or holds it as a rental property.
Looking ahead, effective for transfers made on or after February 16, 2021, this exclusion will no longer be applicable, except in only two narrow circumstances: (i) if the property is used as the child or grandchild’s primary residence or (ii) the property is a farm.
Even under these new narrow rules, the property tax bill will still increase somewhat, because there will be a partial reassessment if the property’s taxable value exceeds $1 million.
Strategy. To take advantage of the current rules, parents may want to transfer vacation or rental properties to their child(ren) before February 16. However, any decision to transfer property to a child during the parents’ lifetimes must include an analysis of the gift and income tax consequences to both the parents and the child, as the child will have the parents’ carryover income tax basis.
Assuming the property has appreciated in value since it was purchased, the transfer may result in a large capital gains tax when the children sell the property. Unlike inherited property, where the child will receive a step-up in basis equal to the fair market value, with the gifted property the child will have the same basis as their parents. Depending on the size of the parents’ estate and the property value, the desire to minimize income tax may outweigh the property tax savings, especially if the property will be sold after the parents’ death.
Phoenix tax attorney David Cohen is licensed to practice in California and has extensive experience in advising clients concerning California real estate, business and tax matters.
More about Frazer Ryan’s legal services regarding the complexities of California real estate, probate, tax and business law.
