Property Tax Assessment and Estate Planning

An issue that frequently arises in estate planning is the reassessment of property taxes. In California, property taxes are based on the assessed value of the property. When a property is sold or transferred, a reassessment of the value of the property may be triggered. With steady increases in the value of property in California in recent years, reassessment has generally resulted in a higher property tax burden for the buyer or transferee of the property. Fortunately, there are numerous transfers that are excluded from reassessment. This article will examine the basics of property tax reassessment and some of the most important exclusions.

The Basics

Property tax is calculated based on the value of the property at the time it was acquired. Any change in ownership of real property can trigger a reassessment of the property’s value. California Revenue and Taxation Code §60 defines a “change of ownership” as a transfer of a present interest in real property. A transfer of present interest includes but is not limited to, a sale or purchase, gift, or inheritance. Any transfer of present interest will result in the property being reassessed to its present fair market value. If the present fair market value is lower, property taxes will decrease, if the present fair market value is higher, property taxes will increase. These rules apply to transfers of portions of properties as well. For example, if only 50% of a property is transferred, 50% of the property will be reassessed. 

Property Tax Exclusions

Fortunately, many exclusions to reassessment exist under California law. The following are some of the most important exclusions in an estate planning context:

The Parent-Child Exclusion

Prior to 2021, parents could transfer property to their children without reassessment. This rule also applied to transfers between grandparents and grandchildren. Proposition 19 repealed the former parent-child and grandparent-grandchild exclusions, limiting the value of the exemption and adding additional requirements to qualify for the exemption. As of February 16, 2021, the exclusion is limited to $1,000,000. Additionally, in order to receive the exclusion, the property transferred must be the principal residence of the transferor (parent) and transferee (child). 

For children inheriting a property that has increased significantly in value, over the $1,000,000 limit, this can lead to high property tax bills. Additionally, in order to claim the exemption the inheriting child must make the inherited property their principal residence. 

Interspousal Exclusion

Under RTC §63, transfers between spouses during marriage are excluded from reassessment. Transfers after marriage in connection with a property settlement agreement or dissolution are also excluded. 

Transfers to Trust

Transfers of property to a living trust will not trigger a reassessment. Transferring property into a trust will not trigger reassessment so long as (1) the transferor is the present beneficiary of the trust or (2) the trust is revocable. Transfers out of trust back to the person creating the trust are also excluded from reassessment. Thus, transferring property to a trust for the purposes of estate planning does not trigger a reassessment. 

Cotenancy

Transfer of a co-tenancy interest from one cotenant to another due to the death of one cotenant may be excluded if the conditions set forth in RTC §62.3 are met. For example, the transfer of a 50% interest through joint tenancy upon the death of the co-owner of a property (who lived in the property) will not trigger a reassessment.

Business Entities 

Certain transfers to business entities will not trigger reassessment if the following conditions are met: (1) the transfer is simply a change in the method of holding title to the property and (2) both before and after the transfer, the proportional interests of the property of transferors and transferees are identical. For example, if a person owns 100% of a property and transfers that interest to an LLC, which the person owns 100%, reassessment will not occur. 

Understanding property tax reassessment is a crucial part of estate planning in California. While any change in ownership can trigger reassessment, there are several important exclusions to be aware of, such as the parent-child exclusion, interspousal exclusion, transfers to trust, co-tenancy, and certain transfers to business entities. To avoid a potentially higher property tax burden, it’s important to work with an experienced attorney to navigate this complex issue and understand the property tax implications of your estate plan. Contact the experienced Estate Planning Attorneys at Naimish & Lewis, APC. today to learn more and ensure your estate plan is in compliance with California property tax laws.