Preserve Your California Prop 13 Base Year Value For Your Children/Grandchildren

By Mikey and Steven Hall

This article is intended to be a general discussion only, and should not be considered legal or tax advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

In June of 1978, Proposition 13 passed in California and established base years for all real estate properties in the state. For people who owned property before March 1, 1975 the base year was established as of that date. Thereafter, as properties changed ownership the value at the time of the transfer was adopted as the new base year. On average, property values have increased over time and each new buyer who acquires real estate in California understands they may have to pay more for property taxes than the previous owner.

So far, so good, except children and grandchildren who inherited real property were treated as new owners because by law the inheritance was considered a change in ownership causing the parents/grandparents lower base year value to disappear. As a result, the property tax could jump to 2 or 3 times its previous level.

The unintended result was a dampening effect on the continuing family ownership of real estate in California. To counter this effect, propositions 58 and 193 were passed in November of 1986 and March of 1996 respectively. The details of these laws can be found in Section 63.1 of the Revenue & Taxation Code.

In general, transfers of real property between parents and children and vice versa, as well as transfers from grandparents to grandchildren are excluded from reassessment. Transfers from grandchildren to grandparents are not excluded, and in the case of transfers from grandparents to grandchild, the parents of the grandchild must be deceased as of the date of purchase or transfer.

"Children" are considered to be the natural children, stepchildren, sons-in-law and daughters-in-law, and children adopted before the age of 18. The same requirements apply to grandchildren, step-grandchildren, and grandchildren-in-law.

Principal residences are excluded from reassessment, as well as, an additional $1,000,000 of the seller's or decedent's other real property. An exception to the principal residence exclusion exists for grandchildren who have previously received a principal resident (possibly from their parents). In such a case the grandparent's principal residence will be treated at "other real property" and will be subject to the $1,000,000 limitation.

The $1,000,000 limitation is determined by the assessed value of the property immediately before transfer. The sales price or actual "current market value" does not affect the $1,000,000 limit. This limit is cummulative and once exceeded all later transfers will be reassessed except for the principal residence.

Happily, the $1,000,000 exclusion is a separate limit for each parent giving the community property of married parents a $2,000,000 limit. For grandchildren, the limit would be $1,000,000 from the father's side (including grandparents) and $1,000,000 from the mother's side (including grandparents).

The value of professional estate planning becomes obvious when it is realized that transfers by sale, gift, devise or inheritance all may qualify for the exclusion. Moreover, transfers to individuals and from trusts to individuals and from individuals to trusts may also qualify for the exclusion.

It falls to the person receiving the property to file a claim with the appropriate Assessor's office within three years of the date of transfer and before any transfer to a third party or within six months after the date of mailing of a Notice of Assessed Value Change resulting from the transfer of the property, whichever is later. There are some exceptions to these deadlines. Once the claim is filed, the Assessor will determine if the transaction qualifies.

Any transfers you are planning should also be carefully considered in light of the relevant federal estate and gift tax laws.

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