The Kids Are Alright
By Lauree Borup
Mrs. Million passes away at the age of 100, after outliving her two children. She wills her family home, worth $1,000,000, to her two grandsons. If this happened before February 16, 2021, they could rent the house out, split the income, AND keep the property taxes the same as when Grandma died. But after Proposition 19 passed in California, this heir-friendly tax benefit changed. Now, in order to keep the Prop 13-era tax assessment of $200,000 valuation, one of them has to live in the house, call it their primary residence, and claim the homeowner’s exemption.
Grandson Scott is disappointed because for years he had planned to turn the house on the golf course into a vacation rental. He already owns his own home, and doesn’t want to move. Grandson Rory is happy, because he wants to live in the house, and he can inherit the low tax valuation. The two of them work it out. Rory buys Scott out, and files Board of Equalization form 19-G with the County Assessor within the one-year-of-transfer deadline.
Before prop 19, children or grandchildren could inherit a primary home of ANY value and retain the date-of-death tax valuation (TV) whether they lived in the house or not. And they could inherit other real property and keep those low TVs up to a $1,000,000 in value. An average of 70,000 real estate to child/grandchild transfers a year resulted in an estimated loss of annual tax revenue of around $1.5 billion. The California Association of Realtors sponsored Prop 19 on the 2020 ballot partly because this sweet tax benefit was under attack, and might have been lost entirely. The new law will generate more local property tax revenue. It will cause more heirs to sell these properties (if they don’t move into them) and free up more housing for buyers.
If the property market value is more than $1M higher than the original tax basis, then the tax break is “capped”. For example, “Sheila” exceeded this cap when she inherited her Dad’s primary home this year that was worth $1,800,000. The original tax basis was $400,000. The new taxable value will be $1.8M minus $1M, or $800,000. This formula applies because the value of the property at time of transfer was more than $1M over the taxable basis.
Sheila moves into the house with a friend, and because it is her primary home now, she files BOE form 19-P. Form 19-P’s official title is: CLAIM FOR REASSESSMENT EXCLUSION FOR TRANSFER BETWEEN PARENT AND CHILD OCCURRING ON OR AFTER FEBRUARY 16, 2021.
What if Sheila’s Dad had sold her the house before he died? Would she still qualify for the $1M break in tax reassessment? Yes, she would. The transfer can be a sale, or a gift, or an inheritance.
What if she preferred to buy Dad’s vacation house, and not the home he lived in full-time? The vacation house would be reassessed based on what she paid for it (or market value determined by the County Assessor if she paid a low amount). Prop 19 eliminated the transfer of base tax values to children or grandchildren for vacation or investment properties.
Lauree is a Broker-Associate with RE/MAX Gold in Groveland.