Considering gifting a piece of real estate in California to your child or grandchild? This guide will help you take action in your planning. There are several pieces of legislation you can take advantage of that can have significant property tax savings implications. Pay attention to Number 4 - Prop 19 is changing how parents and grandparents can transfer property. This goes into effect on February 16, 2021.

1. Prop 13 - Not an Unlucky Number!

   Prop 13 passed in 1978 and set base property values to 1975 values (1% of the 1978 value). Post-1978, properties are subject to a 2% cap increase of the assessed value. This cap remains in place until the property is transferred.
   
   For example, a home valued at $175,000 in 1978 was subject to the max cap of 2% every year for 42 years and never transferred to a new owner, in 2020 the tax assessed value of the home would be $402,017.00. It's entirely possible the home's market value is significantly higher than the tax assessed value.
   
   Once the property is transferred, the transfer triggers a reassessment of the property to catch up to current values. This could mean a significant increase in the assessed value and annual taxes for the new owner. Certain transfers may be exempt from the reassessment if the right steps are taken to minimize the impact.

2. Primary Residence v. Non-Primary Residence: The $1M Exclusion Rule

   Prop 58 allows the transfer of property from parents to children (or Prop 193 for the grandparent to grandchild transfers). If the property is the parents' primary residence, there is no limit in the taxable value of the property. If the property is a non-primary residence, each parent is entitled to transfer up to $1M in value (combined $2M in value with two parents).

3. The Forms - Follow the Rules!

   Two forms need to be completed with a parent-child transfer.
   
   The Preliminary Change of Ownership Report (PCOR) identifies the parties and asks questions about the transaction. This form should be recorded at the same time as the grant deed or you may be assessed additional recording fees.
   
   The Claim for Reassessment Exclusion for Transfer Between Parent and Child form is required to take advantage of the Prop 58 benefits. This form asks similar questions as the PCOR, but requires significantly more detailed information about the parties. This form also has time requirements. It should be filed at the same time the grant deed is recorded, but can be filed up to one year (new in 2021) after the transfer. There is no guidance on whether there will be an escapement of supplemental taxes if the time is missed. Prior to Prop 19 you could apply for an escapment of supplemental taxes after the 3-year window.

4. Update for 2021 - Prop 19

   On November 3, 2020, voters in California voted in favor of Prop 19 (The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act). Prop 19 dramatically limits the ability of parents to transfer property to their children.
   
   Beginning February 16, 2021, a property transferred from a parent to child:
   1. Must be the principal residence of the trasnferror (parent) and transferee (child)
   2. The value limit of the current taxable value plus $1,000,000 (example assessed value is $250,000 + $1,000,000= $1,250,000 can be transferred. If property is valued at $1,350,000, the additional $150,000 will be reassessed).
   3. Child must file homestead exemption within 1 year (instead of 3 years).
   4. Completely eliminates the transfer of "other real property" other than the principal residence.
   
   Prop 19 also changes the "base year value" for persons aged 55 and older or disabled or affected by natural disaster that is outside the scope of this article.
   
   Before transferring property, it is strongly advised to consult your tax professional and estate planning attorney.

Additional resources provided by the author

If you plan on preparing the deed and forms on your own, visit your county's recorder/assessor's website for fillable PDF forms to claim the property tax exemption, preliminary change of ownership, and recording cover sheets. You can also learn the recording fees for the deed on their website. There are other considerations to address before undertaking this type of transfer. You should contact an attorney, at a minimum to assess title, and your trusted tax advisor. Your team will ensure you are making the most informed decisions regarding your most valuable assets.