I often get questions from clients on this topic, so I thought a brief article was in order. There is a lot of confusion out there on this new law that went into effect in 2021.
On February 16, 2021, Prop. 19 went into effect and modified existing law as it relates to any California real property purchases or transfers between parents and children. The parent-child exclusion enables children to inherit their parents’ property and parents to inherit their children’s property without a property tax increase, subject to certain qualifications and limitations.
Before the law changed, parents as the transferor could transfer their primary residence to one or more of their children by way of gift or inheritance without a reassessment of the property taxes. There was no limit on the value of the home that could be transferred. The child or children could live in the home, rent it out or use it as a vacation home. In addition to this allowable transfer under the old exemption rules, parents could transfer up to $1MM of additional assessed value of other California real estate. The same was true in the reverse for transfers from children to parents and transfers between grandparents and grandchildren (but only if the interceding generation was deceased—i.e., the grandparents’ child was deceased).
After the law changed on February 16, 2021, the parent-child exclusion now only applies if the child or children the primary residence is gifted to or inherited by uses the primary residence as their primary residence. If the home is transferred to multiple children, all of the children must use it as their primary residence in order to benefit from the parent-child exemption from reassessment. The exclusion as does not apply to vacation homes or rental properties (only to the parents’ primary residence) and a primary residence that is transferred cannot thereafter be used as a rental or vacation home.
Further, the new law defines a “child” as a natural born child, a child adopted before age 18, a step-child (if their parents are still married), a son-in-law, a daughter-in-law, and a grandchild (if the grandchild’s parents are both deceased). A Homeowner’s Exemption form must also be filed in addition to the Parent-Child Exclusion form (Claim for Reassessment Exclusion for Transfer Between Parent and Child) to take advantage of the exemption with the local County Assessor’s Office. Additionally, only the first $1MM of increased value can be sheltered from reassessment on the primary residence.
The Assessor may ask for additional supporting documentation before granting the exclusion including a copy of the transferor’s trust, will, death certificate and/or marriage certificate.The new law change certainly makes it more challenging for clients to shield their California properties from reassessment when they pass them on. If you would like our help in establishing or updating your estate plan to better plan for this new law or for any other reason, please contact us at (760) 448-2220.