Changes to the Parent-Child Exclusion After Prop 19
In my November article, I went over the current rules for how property is taxed after being passed on to a child. With the passage of Prop 19, those rules will change on February 16, 2021. As promised, here is an overview of what will be different and how Prop 19 could affect your property taxes.
As I stated in November, the current rules allow you to transfer your entire property tax basis in your primary residence to your child or children. In plain English, that means that, if your children choose to keep your house, they will pay the same property taxes you would pay if you still owned the property.
Secondary residences – i.e., any property that is not your primary residence – are a bit different. Under the current rules, you can transfer up to $1 million of assessed value ($2 million for married couples) to your children; anything over that amount will be reassessed.
Prop 19 changed the rules for both primary and secondary residences. After February 16, 2021, secondary residences will be reassessed upon the date of the transfer. Period. No exclusions, no discounts, nothing.
Primary residences will still have a parent-child exclusion, but only if the child moves into the property and makes it their primary residence. Even then, the exclusion is no longer unlimited. Under the new rules, the Assessor’s Office will look at the difference between the assessed value (what you’re currently paying taxes on) and the fair market value (what a new owner would be paying taxes on). If the difference between the two is greater than $1 million, the amount over $1 million will be reassessed.
What Does This Mean for Me?
If the plan is to sell all your property after your death and give your children the cash, then there is no issue. The federal step-up in basis is still in effect, so your children will still pay much lower capital gains taxes than you would if you sold the property during your lifetime. If your children want to keep the property without the property being reassessed, then you have a problem.
What Should I Do?
If you want the property to be sold after your death, you don’t need to do anything. If your children want the property and your current tax basis, then you can
- Transfer the property to your children now, before the new rule takes effect. Bear in mind that there would be no step-up in basis on your death, so your children will pay large capital gains taxes if and when they choose to sell.
- Consult an attorney (ideally one that knows a lot about both taxes and estate planning) for more complicated strategies that may allow you to keep the property in your name and pass it on later, without losing the federal step-up in basis or triggering reassessment. Bear in mind that it’s unclear at this time which, if any, strategies will be successful in the long run. The whole point of this change is to increase California’s property tax revenues, so the government will likely try to close as many loopholes as it can.
If you have any questions about the above or would like help transferring your property, you are welcome to email me at email@example.com.