California Real Property Tax and Estate Planning
One of the greatest advantages of a properly created estate plan is passing the property tax basis of real property owned in California to your children or grandchildren. Normally when a property transfers ownership, a reassessment is performed pursuant to California’s Proposition 13, resulting in an increase to property tax on the property. Under Proposition 13, all real property has established base year values, a restricted rate of increase on assessments of no greater than 2% each year, and a limit on property taxes to 1% of the assessed value. Practically speaking, this means if you have owned your home for a long time, you are paying much lower property taxes than your neighbors who just bought their house.
For people that would like to transfer real property to their children when they pass, Proposition 58 creates a very important exception to the general rule of reassessment on transfer. Proposition 58 allows a person to transfer ownership to a child without triggering the change in ownership rule and allowing them to avoid the reassessment.
For estate planning purposes, this means that a parent can avoid his or her property being reassessed, and his or her heirs can avoid paying additional property taxes, by leaving the property to his or her child. In the Silicon Valley this is especially important because of the increase in property values in this area.
While this may seem relatively straightforward, there are many mistakes people make that will cause the transfer of real property after the death of a parent, resulting in reassessment of the property. One of the most common mistakes we see is after the death of the parent, the children decide that one sibling should receive the family home and the other siblings receive other assets of the same value. If this not done properly, the transaction will be deemed to be a transfer between siblings, which will cause a reassessment of the property and an increase in property taxes.
There is also an exclusion to reassessment for transfers from grandparent to grandchild, under Proposition 193. For this exception to reassessment to apply, the parents of the grandchild must die before the grandparent. Further, the spouses of children are considered “children” of the grandparent. For example, if the daughter of the property owner died before the property owner and was married at the time of her death the property owner’s son-in-law would be considered a “child” under Proposition 193. Therefore, if the property owner wanted to transfer the real property to daughter’s children, that transfer would be reassessed because the son-in-law is still living and considered a child of the property owner.
There are strategies that you can use to transfer your low property tax basis on real property in California to your children or grandchildren. This can be important because property taxes must be paid every year, so the benefit to the beneficiaries and be substantial. If you own real property that you would like to someday transfer to your children or grandchildren it is important that you create an estate plan with experienced estate planning attorney to ensure that your assets will be transferred to your beneficiaries in the most tax efficient way possible.