Proposition 13 Exemptions

My article last month about California’s Proposition 13 prompted a lot of questions, so I thought it might be helpful to go over some more details about how some of the most common exemptions work.

As a reminder, the basic rule is that a property is reassessed to market value when it is transferred.  That is true whether or not you actually pay for the property.  Even if you give away your house as a gift, the assessor will determine what the market value is (in much the same way that a private appraiser does), and base the new taxes on that value.

This can mean a huge difference in property taxes.  I’ve seen situations where a reassessment would result in a tax bill 10 or 20 times higher than it was before, and that’s every year from then on.  So under what circumstances can you avoid reassessment?

Trust Transfers: The vast majority of my clients take advantage of this exemption.  Transfers into or out of certain types of trusts are exempt from reappraisal, meaning that your tax bill won’t change because we have created a living trust for you.

Children: Some, but not all, transfers from parents to children (or the other way around) are exempt from reappraisal.  If the property is the transferor’s primary residence, then the transfer is exempt.  If not, each person has a lifetime $1 million of other property that can be exempted from reappraisal.

Fortunately, given our property values, that $1 million refers to the stated tax value, not the (often much higher) market value.  And it’s per person, so a married couple can transfer their house plus $2 million of other property, all without reappraisal.

If you have more real estate than that?  Well, then you will have to choose which properties you want to apply your exemption to.  All of this is done by filing a form called “Claim for Reassessment Exclusion for Transfer Between Parent and Child.”  The parent-child exemption is not automatic, even for your primary residence, so if you don’t file the form you may find your property reassessed.

Grandchildren: If you thought the rules for transfers to children were complicated, they’re nothing compared to the rules for grandchildren.  The rule came about because it seemed unfair that you could do a two-step transfer (parent to child, then child to grandchild) and be exempt, but if the child is dead, then you were stuck.  So, a new rule was added to address this apparent unfairness.

In order for a grandparent-grandchild transfer to be exempt, not only does the intervening child need to be dead, but the grandchild’s other parent must be, too.  That’s right, the son- or daughter-in-law being alive would cause the transfer to be reassessed.  Unless they got remarried first . . . and you don’t get to use the residence exemption if the deceased parent used it before . . . .

Come to think of it, the grandparent-grandchild situation is a great example of the general rule that if you’re transferring property in California and are concerned about the property tax basis, it’s much easier to make your transaction fit these rules if you do it from the beginning.  So call me first.

March 5th, 2015 Posted to Estate Planning | Comments (2)