Transferring Tax Basis to Kids

1

http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm#1

What are Propositions 58 and 193?

Proposition 58, effective November 6, 1986, is a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property between parents and children. Proposition 58 is codified by section 63.1 of the Revenue and Taxation Code.

Proposition 193, effective March 27, 1996, is a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of the grandparents are deceased as of the date of transfer. Proposition 193 is also codified by section 63.1 of the Revenue and Taxation Code.

In the State of California, real property is reassessed at market value if it is sold or transferred and property taxes can sometimes increase dramatically as a result.

However, if the sale or transfer is between parents and their children, or from grandparents to their grandchildren, under limited circumstances, the property will not be reassessed if certain conditions are met and the proper application is timely filed.

These propositions allow the new property owners to avoid property tax increases when acquiring property from their parents or children or from their grandparents. The new owner’s taxes are calculated on the established Proposition 13 factored base year value, instead of the current market value when the property is acquired.

Which transfers of real property are excluded from reassessment by Propositions 58 and 193?

  1. Transfers of primary residences (no value limit).
  2. Transfers of the first $1 million of real property other than the primary residences. The $1 million exclusion applies separately to each eligible transferor.
  3. Transfers may be result of a sale, gift, or inheritance. A transfer via a trust also qualifies for this exclusion. For property tax purposes, we look through the trust to the present beneficial owner. When the present beneficial ownership passes from a parent to a child, this is a change in ownership that is eligible for the parent-child exclusion.

What value of the transferred property is counted toward the $1 million exclusion limit?

The Proposition 13 value (factored base year value) just prior to the date of transfer. Usually, this is the taxable value on the assessment roll. If a property is under a Williamson Act (open space) or Mills Act (historical property) contract, it is the factored base year value that is counted, not the restricted value.

1 Like
2

Prop 13 + Prop 58 = Mother of all wealth transfer!! Imagine that Palo Alto rancher someone bought for 15K back in 1970 that’s worth 5M now. The lucky kid who inherit it will pay 1k a year in property tax. Being a NIMBY he will also block other developments in PA thus ensuring his property value stays sky high.

America is turning into a landed aristocracy. We fought with Britain for nothing…

3 Likes
3

unless having one kid that will inherit the primary - good luck trying to keep it in the family… Sell and split is the most common option between siblings.

1 Like
4

I would have to agree with you on that one 100%, @BAzx. This came up recently for me with a distant family where the last parent died and sadly even before the body was practically cold there was infighting amongst the siblings and ultimately the place had to be sold (against the wishes of the dead parent).

I believe my siblings wouldn’t squabble over our family building since we all are financially ok even without it and we all have vowed to go with our mom’s traditional wishes (goes to first son to stay in family name) which shouldn’t be a problem since he has the means to buy us all out easily but you never really know until it happens. I reminded my mom of that family. There are no guarantees my brother’s children won’t immediately sell the building for a tidy sum once the parents kick the can. She gets it, now.

5

Manch, now that you are part of the landed aristocracy, relax and enjoy it…PA envy will get you nowhere…besides the place is overrated. .lots of traffic in and out, full of snobby wannabes. .Marin County is where the old money is…Pine away for Ross or Tiburon. …infinitely better than PA. …lol

1 Like
6

Thought is still subject to estate tax (if death) or capital gain tax (if over gift limit).

7

No doubt. Time to replace PA envy with Noe envy. Haha.

8

Got to bring this back alive. Any real estate lawyer/broker here?
what is the best way to transfer property to son.

Can i do this?
With the zero dollar sale agreement, we set the price of the sale in the document and basically say that 900K is in the form of a gift with a 10K purchase price (something nominal).
Do i get the stepped up basis + property tax not reassessed?

thanks

9

the recipient will need to pay tax on the gift as it exceeds the gift amount that is tax free. don’t do this.

1 Like
10

Every year, you can give up to a certain amount to anyone you want without having to deal with the gift tax at all. For 2018 and 2019 , that amount is $15,000. Two parents, one child can get $30k of gift.

Not a legal advice, just thinking aloud:
To transfer property to your children earlier than your death, the common strategy is form a company with x number of shares holding that property. Give each child enough shares annually that is less than the gift limit.

Consult your lawyer for detailed implementation.

2 Likes
11

If you do 10k purchase price, you are inviting trouble from

  1. local county for property tax reassessment
  2. CA Franchise tax board - evading taxes
  3. IRS - evading taxes

Lawyer charges are too high and each one will be promoting their own ideas…etc.

Best is to create a revocable trust, include the property into that trust. You can assign your kids as manage the trust or make them successor trustee. Home will be in your name, but they get the property after your time. Create revocable trust with the help of a lawyer.

1 Like
12

Trust is a good option to explore. Also - the property tax basis keeping with the original owner (thus enjoying the Prop 13 rate) is only limited one property transfer between a (deceased) parent and their immediate kids. Definitely consult with a knowledge local trust attorney on this area.

1 Like
13

But can subtract the difference in the lifetime gift exemption
combined lifetime gift and estate tax exemption, which is $11.18 million for any person who dies in 2018, or $22.36 million for a couple. (People receiving gifts usually are not subject to gift tax.)

14

Trust got one downside, if rented out now. Then the owner(parents) still have to file tax on rental income, lot of trouble