When administering the assets of a deceased family member’s estate, the county-level property tax reassessment rules for transfers of California real estate are often ignored. In general, when the transfer of property occurs, the taxable value on which the property tax is assessed is changed to market value, often a higher value. But, there are exceptions!
Most of us know property taxes are paid to your county and based on a percentage of the “assessed value” of your home. But housing prices change all the time, so how does the county come up with this value? When real estate is bought or sold the property’s “assessed value” is set at the purchase price. Every year the county can adjust the value of any and all properties in the county. However, thanks to Proposition 13 passed in 1978 the maximum increase per year in California is 2%. Therefore, even if your house doubles in value next year, your “assessed value” and property taxes can only increase by 2%! More good news, if your property declines in value you can file to reduce your tax base.
So, how does this effect the management of an estate? California passed another proposition in 1986 that allows a parent to transfer property to their children without updating the “assessed value”. This means the “assessed value” of a property will not reset when a child inherits, purchases, or receives real estate as a gift from their parents. However, an election must be made to prevent an update of the taxable value of the home. The example below uses median home prices in San Diego County to illustrate what type of impact this can have:
Your mother passed away in 2017 and as a result you inherited her home. If she originally bought the home in 1996 for $177,000, at the time of her death the property tax assessed value would be about 268,000 and the market value might be around $607,000. The property tax rate is 1%, therefore the property tax savings is almost $3,400 per year.
- With the election: property taxes will be about $2,680 per year
- Without the election: property taxes will be around $6,070 per year
Are there any limits to what can be transferred without resetting the tax? Yes, the proposition excludes the following transfers between parents and children from reassessment:
- No dollar limitation for transfers of a principal residence owned directly by transferor; and
- $1 million limit on taxable value immediately before transfer of real property, other than principal residence, owned directly by transferor.
A similar exclusion is available for transfers between grandparents and grandchildren, provided that the grandchild’s parents have passed away. It should be noted that transfers between siblings or other family members are not excludable from reassessment.
Is it always beneficial to file for exclusion from reassessment? No. If the market value at the time of transfer is lower in value than the assessed value on the property tax statement then it would be better for the new owner not to claim the exemption.
With property values increasing and the property tax deduction being limited beginning in 2018, more taxpayers should be aware of the above-mentioned information. If you have any questions regarding California property tax reassessment, please feel free to contact us at (858) 558-9200.