Estate Planning to Retain Your Proposition 13 Tax Base

The passage of Proposition 13 in 1978 established an initial base year, 1975-76, for assessed valuation for California real property that had not undergone a change in ownership since February 1975. Under Proposition 13, property taxes are limited to one percent of the assessed value of the property. Additional property taxes may be approved for schools or local projects, which can vary amongst communities and bring the tax rate higher than one percent. It also created a cap of two percent a year for increases in assessed values in the years after 1975 or subsequent to a change of ownership. One way that a change in ownership might occur is the death of the owner which results in a reassessment of the property to its current market value and the establishment of a new base year value upon which future property taxes will be calculated. Careful estate planning to make effective use of exclusions from reassessment for transfers to children and/or grandchildren could preserve the original base year assessment.

Impact of Proposition 13

As demand for California real estate drove market values higher and higher, Proposition 13 offered much-need protection against astronomical increases in tax bills. For example, someone who purchased their home between 1968 and 1975 when median home prices were less than $50,000 benefited from seeing the market value of their home appreciate each year without being hurt by higher property taxes based upon periodic reassessments by local Assessors.

Proposition 13 protects someone who purchased their current home in 1975 from being reassessed at today’s property values. According to Zillow, the median value of a California home in today’s market is $548,000 and is expected to go up another 7.3 percent over the course of the next year.

Extending the Benefits of Proposition 13

The death of the owner of real property allows the counties to reassess the property because of the change of ownership as it passes to heirs. Voters approved an extension of Proposition 13 to exclude transfers of real property between parents and their children from triggering a reassessment.

Proposition 58 was approved by voters and became effective in 1986. Transfers of real property by a parent to a child are excluded from reassessment provided the base year value is $1 million or less. If the property is used by the parent as a primary residence, the $1 million limitation does not apply and the child takes the property at the parent’s assessed value. When parents transfer property they own together to one of their children, the exclusion increases to $2 million.

Children eligible to take or inherit their parent’s assessed valuation includes the following:

·        A child of the parent
·        A stepchild of the transferor
·        A son-in-law or daughter-in-law of the transferor
·        Children adopted before they were 18 years of age.

Maximizing the Benefits of Proposition 58 Through Estate Planning

It is important to keep in mind that the $1 million exclusion permitted by Proposition 58 is not computed on the fair market value of the real property being transferred from a parent or the parent’s estate to a child. Instead, it is computed using the property’s assessed value as currently carried on the county assessment rolls.

For example, a property might have a fair market value of more than $1 million, but depending upon when it was acquired by the parent, it could have an assessed value of substantially less. Whatever portion of the $1 million exclusion is not used on a property is available for application to other properties transferred from the parent to the same or other children.

Depending upon the assessed values of the property parents own and how much of it their property is an investment property and not a primary residence, an estate plan could take maximum advantage of each parent’s $1 million exclusion. The result could be that upon the death of the last surviving parent, the increase in real property taxes to the children to whom the property passes could be kept lower than it would have been without strategic planning.

An Estate Planning Attorney Can Help

An estate planning attorney is a good source of legal advice about how to maximize the benefits of Propositions 13 and 58. If you would like more information about estate planning, contact the attorneys at Magee & Adler by calling today at 562-432-1001 to schedule an appointment.