TAX-SAVING STRATEGIES October 27
Property Taxes in CA: What Happens When Parents Give Their Kids A House
It seems scary at first but there IS a right way to do it.
by Dean Ferraro, EA
Trying to figure out taxes on something worth hundreds of thousands of dollars IS scary.
I've gotten a lot of calls recently from taxpayers who are the recent recipients of their parent's real estate.
The Baby-Boomers are already starting to retire in droves and they are getting tired of the upkeep of their family-sized homes. Moving towards fixed retirement incomes and the lack of motivation to keep up with the Joneses, some would like to downsize and hand off the family home to their son or daughter starting their own family.
"So what happens to the property tax rate when a house is passed from parent to child in CA? It goes up right? Isn't it re-assessed when the deed changes ownership?"
It most cases, yes, the property taxes do go up on property that is sold in CA. A house bought in 1965 for $50,000 could be worth $500,000 in today's market. The person who bought in 1965 has been paying property taxes on the original price plus percentage increases in the property value capped at a certain percent per year.
That 1965 owner could be paying property taxes of 1% on $75,000 ($750/yr) based on the home's 1965 value today(Prop 13), but when the new buyer purchases the home at $500,000 this year, their re-assessed property taxes are now adjusted to 1% of the home's updated value worth $500,000! Property taxes are now $5,000/yr! OUCH!
"So if my parents want to give me their house, I should say "No," because I just can't afford those property taxes on top of everything else."
In our sunny state, we have Proposition 58 and 193 which govern the taxability of a transfer of property between parents and kids and grandparents and grandchildren! It is called the Reassessment Exclusion for Property Transfers.
CA voters decided, and rightly so, that we needed a simple way to "keep property in the family."
So if your parents or grandparents want to give you their personal residence or any other real estate valued at less than $1,000,000 in the State of CA, smile and say "yes!"
What are Propositions 58 and 193?
Proposition 58, effective November 6, 1986, is a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property between parents and children.
Proposition 58 is codified by section 63.1 of the Revenue and Taxation Code.
Proposition 193, effective March 27, 1996, is a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of the grandparents are deceased as of the date of transfer.
Proposition 193 is also codified by section 63.1 of the Revenue and Taxation Code.
In the State of California, real property is reassessed at market value if it is sold or transferred and property taxes can sometimes increase dramatically as a result.
However, if the sale or transfer is between parents and their children, or from grandparents to their grandchildren, under limited circumstances, the property will not be reassessed if certain conditions are met and the proper application is timely filed. These propositions allow the new property owners to avoid property tax increases when acquiring property from their parents or children or from their grandparents. The new owner's taxes are calculated on the established Proposition 13 factored base year value, instead of the current market value when the property is acquired.(!)
Which transfers of real property are excluded from reassessment by Propositions 58 and 193?
Transfers of primary residences (no value limit).
Transfers of the first $1 million of real property other than the primary residences.
The $1 million exclusion applies separately to each eligible transferor. Transfers may be result of a sale, gift, or inheritance.
A transfer via a trust also qualifies for this exclusion. For property tax purposes, we look through the trust to the present beneficial owner. When the present beneficial ownership passes from a parent to a child, this is a change in ownership that is eligible for the parent-child exclusion.
Is there any time limits to file the claim for exemption?
- Within three years after the date of transfer or before a transfer to a third party.
- Within six months after the date of supplemental or escape assessment issued as a result of the real property transfer for which the claim is filed.
If you make a mistake and file late, the claim you send in will give tax relief starting in the tax year it was received. So if you received the property in 2010, and sent in your claim June 2016, your exemption would begin in 2016.
What forms do I need to file?
- Form BOE-58-AH - Claim for Reassessment Exclusion for Transfer Between Parent and Child
- Form BOE-58-G - Claim for Reassessment Exclusion for Transfer From Grandparent to Grandchild
I hope this post was helpful in clarifying the property tax issues that arise when property is passed down to children and grandchildren.
If you'd like help with this, contact my office at 949-542-2394. If you think you're paying too much in property taxes ask us about that too!
See: https://www.boe.ca.gov/proptaxes/pdf/lta13030.pdf for more information.