Reappraisal Exclusion Between Parent to Child
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, under limited circumstances, the property will not be reassessed if certain conditions are met and the proper application is timely filed.
Proposition 58 allow the new property owners to avoid property tax increases when acquiring property from their parents or children. 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.
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.
Transfers of real property excluded from reassessment by Proposition 58 are:
- Transfer of principal residence (no value limit).
- Transfer of the first $1 million of real property other than the primary residences. The $1 million exclusion applies separately to each eligible transferor. The $1 million is the factored base year value, not the fair market value.
Definition and Terminology specific to Proposition 58:
Child: Children include the following: sons and daughters, sons-in-law and daughters-in-law, stepchildren, and children adopted under 18.
Gift/Purchase: Transfers such as a gift or purchase between parents and children are excluded with a completed Prop. 58 form.
Principal Residence: Proposition 58 does not require that the parent or child use the transferred property as his or her principal residence. In addition, the $1 million limit does not apply to the transferor's principal residence.
$1 Million Exclusion: The $1 million exclusion for other property applies for each transferor. Therefore, one parent can transfer $1 million of other property and the other parent can also transfer $1 million of other property for a total combined exclusion of $2 million. These transfers are coordinated State-wide under the million dollar limit.
Legal Entities: Transfers directly between legal entities owned by parents and children are not entitled to the benefits of this measure.
Trusts: A transfer to or from a trust is treated just as a transfer to or from the trustor personally, provided the trust is revocable.
Date of Death of Decedent: The date of any transfer between parents and their children under a will or intestate succession is the date of a decedent's death, which must be after November 6, 1986 (the effective date of proposition 58).
Third Party: A third party is any person or entity that is not a transferee or transferor in the transfer between the parents and children.
Transfer of Real Property to a “Third Party”: For filing proposes, a transfer of the real property to a third party occurs when all the real property received is transferred to someone other than an original transferee or transferor. Therefore, a transfer may qualify for exclusion when a partial interest in the property received is transferred to a third party prior to an application being filed.
A claim form must be completed and signed by the transferors and transferee and filed with the Assessor. A claim form is timely filed if it is filed within three years after the date of purchase or transfer, or prior to the transfer of the real property to a third party, whichever is earlier.
If a claim form has not been filed by the date specified in the preceding sentence, it will be timely if filed within six months after the date of mailing of the notice of supplemental or escape assessment for this property.
If a claim is not timely filed the exclusion will be granted beginning with the calendar year in which you file your claim.
Complete all of Sections A, B, and C and answer each question or your claim may be denied. Proof of eligibility, including a copy of the transfer document and/or trust may be required.
A “child” for purposes of Proposition 58 includes:
- Any child born of the parent(s).
- Any stepchild while the relationship of stepparent and stepchild exists.
- Any son-in-law or daughter-in-law of the parent(s).
- Any adopted child who was adopted before the age of 18.
Spouses of eligible children are also eligible until divorce or, if terminated by death, until the remarriage of the surviving spouse, stepparent, or parent-in-law.
Transfers of non-principal residence is limited to the $1 million per parent. Here’s an example that will clarify how the $1 million is excluded and when and how much is reassessed.
The parent owns 3 properties in California, a principal residence, a rental property and a vacant land.
The assessed value of the principal residence is $100,000. The market value is $1,200,000
The assessed value of the vacant land $300,000. The market value is $850,000.
The assessed value of the rental property is $800,000. The market value is $2,500,000.
- On 12/1/2013, the parent transferred 50% of the vacant land to his child and filed a claim for reassessment exclusion. Therefore, $150,000 exclusion is used towards the maximum $1,000,000.
- On 2/1/2014, the parent transferred the remaining 50% of the vacant land to his child and filed a claim for reassessment exclusion. Therefore, $150,000 + $150,000 = $300,000 exclusion is used. The remaining exclusion is $700,000.
- On 3/1/2014, the parent transferred his principal residence to his child and filed a claim for reassessment exclusion. Since this is a principal residence, there is no limit of the assessed value transferred.
- On 5/1/2014, the parent transferred the rental property to his child and filed a claim for reassessment exclusion. Therefore, the total exclusions used is $300,000 + $800,000 = $1,100,000. The parent has exceeded his limit by $100,000. Thus, $100,000 / $800,000 = 12.5% of the property will be reassessed to market value.
If the interests transferred during each assessment year have a market value of less than five percent of the value of the total property and are worth less than $10,000 in market value, then the transfers may be excluded under section 65.1(a) as a de minimis transfer. No parent-child exclusion claim is necessary for the de minimis exclusion.
On the other hand, if the transfers during any assessment year cumulatively exceed the limit under section 65.1(a), then all the transfers will be subject to change in ownership. In this situation, then the transferees can file for the parent-child exclusion.