In addition to the Senior Reappraisal Exclusion, the second part of Prop 19 is The Parent-Child Transfer.
Understanding the Parent-Child Property Transfer Under Proposition 19
In California, Proposition 19 has significantly changed how property transfers between parents and children affect property taxes. Passed in 2020, it replaced the older Proposition 58 and introduced new rules regarding the transfer of a family home or family farm. This can have major implications for families looking to keep properties within the family while preserving the original property tax assessment. Here’s how the Parent-Child Transfer works under Prop 19 and what you need to know to take advantage of it.
Key Conditions for Parent-Child Transfers
- Eligible Heirs:
- Under Prop 19, property tax benefits apply when a parent transfers property to their child. This includes biological children, adopted children, stepchildren, and sometimes children-in-law if the property is held in a trust.
- Transfers can also apply to grandchildren but only if the child of the property owner (the parent of the grandchild) is deceased.
- Primary Residence Requirement:
- The property being transferred must have been the primary residence of the parent. In other words, this exclusion from reassessment applies only if the home was the parent’s main living place, not a second home or investment property.
- The child must also use the property as their primary residence to qualify for the Prop 19 benefits. If the child does not occupy the home as their primary residence, the property will be reassessed to its current market value, often resulting in higher property taxes.
- Value Limitations:
- Prop 19 allows the property’s assessed value to remain at its original rate (before transfer), but there are limits. If the market value of the property exceeds the assessed value by more than $1,000,000, the property will be partially reassessed.
- In such cases, the assessed value will increase, but not to the full market value. Instead, the new assessed value will be the current market value minus $1,000,000 added to the original assessed value.
Example:
- If the parent’s home has an assessed value of $500,000 but a market value of $2,000,000, the property exceeds the $1,000,000 cap by $500,000. The new assessed value would be $500,000 (assessed value) + $500,000 (excess market value) = $1,000,000. The property taxes would be based on this new figure rather than the full market value.
The Application Process
To receive the benefits of Prop 19’s parent-child transfer, the child must take several key steps:
- File a Claim for Reassessment Exclusion:
- The heir must file a Claim for Reassessment Exclusion for Transfer Between Parent and Child with the County Assessor’s Office. This claim is necessary to prevent a full reassessment of the property and must be done within a specified time period, usually within one to three years of the parent’s death or the property transfer.
- Provide Documentation:
- The Assessor’s Office typically requires documents proving the parent’s death, the relationship between the parent and the child, and evidence that the property is now the child’s primary residence.
- Timeframe to Move In:
- The child is expected to occupy the home as their primary residence within a reasonable timeframe. If the property is not occupied as the child’s primary residence, it will be reassessed at full market value, meaning higher property taxes.
Additional Considerations: Investment Properties and Vacation Homes
One important aspect of Prop 19 is that it limits the types of properties that can benefit from the tax exclusion. In contrast to the previous law (Prop 58), which allowed parents to transfer any type of property (including vacation homes, second homes, and rental properties) to their children without reassessment, Prop 19 focuses on the family home and, in some cases, family farms.
If the property in question is an investment property, vacation home, or other type of real estate, it will be fully reassessed at its current market value upon transfer, even if transferred to a child. This could result in significantly higher property taxes for the child.
Potential Benefits of Prop 19
- Tax Savings: If the property qualifies for the parent-child transfer under Prop 19, the child can preserve the low property tax basis that the parent enjoyed. Given California’s rising real estate values, this can mean substantial savings on property taxes.
- Housing Stability: By allowing children to inherit the family home without being taxed out due to reassessment, Prop 19 helps promote housing stability and generational wealth.
Conclusion
While Proposition 19 introduces some valuable benefits for families looking to keep property in the family, it also brings restrictions that didn’t exist under the previous law. To fully utilize Prop 19’s tax-saving benefits, families need to understand the rules surrounding primary residence requirements, value limitations, and the importance of filing the necessary claims on time. With careful planning and by meeting these conditions, the transfer of a family home can provide significant tax relief to the next generation.
For anyone navigating a parent-child property transfer in California, it’s always a good idea to consult with a real estate attorney or tax professional to ensure all requirements are met and any potential issues are addressed before completing the transfer.
If you’d like to discuss this article or have any other real estate questions, feel free to contact us anytime.
