In mid-December, the state’s Board of Equalization issued both a letter to assessors and a chart of issues raised and options regarding Proposition 19.
In light of this guidance, my last column discussed the changes to a homeowner’s ability to transfer their property tax base value from one home to another brought about by the passage of Prop. 19. That was mostly good news, dampened only by the lack of clarity on some issues.
This column will further discuss the change in the property tax reassessment exclusion that applies to transfers of property between parents and children, effective Feb. 16, 2021.
Your property tax base year value is the assessed value — the value listed on your property tax bill on which the property tax is calculated. It is typically the fair market value of your home at the time you bought it, adjusted annually by up to the 2% allowed under Proposition 13 (as adjusted, this is known as “factored base year value”). The property tax rate is 1% plus other voter-approved fees and assessments, which vary by county.
Under the law prior to Prop. 19, a parent could transfer their principal residence of any value and $1 million of base year value (per parent) in any other property(ies) to children without causing any property tax reassessments. Thus, a single parent could transfer their $1.2 million residence and a $3 million vacation home (as long as it had a base year value of $1 million or less; if two parents are making the transfer, the base year value can be $2 million) to their children, and the property taxes would not change. After Feb. 15, 2021, that will no longer be the case. (And note: the recorder’s offices are closed on Feb. 12-15, so the real cut-off date is Feb. 11, 2021.)
Limits of parent-child transfer exclusions
Prop. 19 eliminated any exclusion from reassessment for transfers between parents and children of any property other than a family farm or a residence that is used by the parent as their principal residence before the transfer and is used by the child as their principal residence within one year of the transfer. No other transfers will qualify for the exclusion from reassessment.
How much can be transferred?
Even if a child inherits a parent’s principal residence and moves into the home as their own principal residence, there may only be partial relief from reassessment, depending on the value of the home.
After Feb. 15, 2021, when a child inherits a principal residence from a parent, there are three options for how the “new” base year value will be determined.
1: If a child does not move into the transferred home as the principal residence within one year from the date of transfer, the property will be reassessed at its full fair market value as of the date of transfer (date of death, if that is how the transfer occurs). There is no ability to transfer the base year value.
2: If the child does use the transferred home: If the value of the transferred home is less than the factored base year value plus $1 million (indexed annually for inflation), the factored base year value will remain the same.
For example, assume Ed and Eleanor Eighty have lived in their quaint Laguna beach home since they bought it in the early 1970s. Their tax base value is a mere $80,000, but the home is valued at $900,000. The tax base value $80,000 plus $1 million dollars is $1,080,000. Since the home is valued at less than that ($900,000), the property tax base value (the $80,000) can be transferred to their son Elijah and no further adjustment is needed. Elijah will pay the same as his parents did in property taxes.
3. If the child does use the home as their principal residence and the value exceeds specified value test: Here the math gets complicated. The language of Prop. 19 reads like an algebraic formula and having read the BOE guidance, I admit to “solving for x” was incorrect in my Dec. 13, 2020 column. It’s worse than originally thought. To use the same example with the algebra now corrected:
Assume Ed and Eleanor Eighty’s Laguna Beach home still has a tax base of $80,000, but the home is valued at $2 million.
If Elijah moves into the home and files the homeowner’s property tax exemption within one year, his new property tax bill will be calculated as follows:
— Calculate the sum of the property tax base value plus $1,000,000
— $80,000 + $1,000,000 = $1,080,000
— Determine whether the fair market value exceeds the sum of the property tax base value plus $1,000,000
— $2,000,000 is greater than $1,080,000
— Calculate the difference
— $2,000,000 – $1,080,000 = $920,000
— Add difference to property tax base value
— $80,000 + $920,000 = $1million
— New combined base year value = $1,000,000
While Elijah is certainly getting some advantage, his tax bill would be twice as much without the exemption. He will be paying substantially more in property taxes under Prop. 19 than his parents did or than he would have under prior law.
Questions and Issues raised
Multiple children. The BOE points out in its Dec. 17, 2020 chart that it is unclear whether a transfer of a parent’s principal residence to multiple children could qualify for the base year value transfer. Must all of the children reside in the home as their principal residence to qualify, or is one child living there sufficient? At this point, further guidance or legislation is needed.
How long does the child have to live in the home? Also unknown is how long the child would need to reside in the home as their principal residence. If the child moves out, what, if anything, happens to the base year value?
Timing. Surprisingly, the BOE raises this question: For a transfer made prior to Feb. 16, 2021, but the application for the parent/child exclusion is filed after, which statute applies? In most circumstances, the date of transfer would be the relevant date. The fact that the BOE even raises this issue means that the cautionary approach would be to make a transfer and file for the parent-child exclusion before Feb. 16, 2021, if you desire to take advantage of the more favorable laws that apply currently.
Appraisals. Prop. 19 appears to require that all principal residences that transfer between parents and children be reappraised to verify qualification for the base year value transfer if claimed. This is certainly going to increase an assessor’s workload, possibly delay approval of claims, and result in additional appeals.
Family farm. The ability to transfer the base year value between parent and child also applies to a transfer of a “family farm.” While “family farm” is defined as “…any real property that is under cultivation or being used for pasture or grazing or to produce any agricultural commodity,” there is much that is unclear about a “family farm” transfer. Must it include a residence? Can a residence and a family farm be transferred? In the words of the BOE, “There will [sic] many questions as to what will qualify as a family farm.”
Parents who wish to transfer property to their children, with the intent that the children own the property for some period of time, would be wise to seek advice on how to do that sooner rather than later. The ability to transfer California real property between parents and children with little or no property tax effect will be greatly diminished on Feb. 16, 2021.
My next column will focus on some options for transfers, whether directly, in certain special trusts, or through the use of entities.
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles. Reach her at Teresa@trlawgroup.net
Source: Orange County Register