As a follow up to my post last week, I wanted to dig into what the Parent-Child Exclusion from Reassessment covers regarding a transfer of a California home from a parent to a child or a child to a parent by gift or by inheritance.
In my last post, I mentioned that the exclusion was capped at $1MM for the primary residence. How the exemption works is that the originally assessed value of the home (the transferor's property tax basis) gets added to $1MM of fair market value for a combined value of $1MM plus the originally assessed value.
So for example, if your parent's primary residence was assessed at $150,000, that value of $150,000 would be added to $1MM giving you $1,150,000 of assessed value that would remain at the current property tax bill amount. Then the Assessor would adjust the amount above that according to the fair market value as determined by the Assessor.
If the Assessor determined that the fair market value of the home is now $1.5MM upon inheritance (and the child the property was left to moves into the home claiming it as their primary residence) then the additional assessment would be on $350,000 (generally speaking real estate taxes are about 1% in San Diego County of assessed value which would add about $3500/year to the property taxes).
If the rules are not followed, the way the property is left to children is not properly drafted and/or the right forms and documents are not filed with the Assessor within the prescribed time limits, you could end up with a full reassessment of the property upon inheritance.
In the example above, if there was a full reassessment, the property taxes would go from $1500/year to about $15,000/year. Whereas with a properly planned and documented Parent-Child Exclusion, the property taxes would be about $5,000 a year, resulting in $10,000/year in property tax savings.
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