This is solely about the transferring of the property-tax basis between parents and children, not income tax.
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?
- Transfers of primary residences (no value limit)
- Transfers of the first $1 million of real property other than the primary residences. The $1 million exclusion applies separately to each eligible transferor.
- 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.
Is it always beneficial to claim this exclusion?No. In cases where the transferred property was being assessed at its current market value under Proposition 8 at time of transfer (that is, its market value had fallen below the transferor’s original Proposition 13 factored base year value), it may be beneficial for the new owner not to claim the exemption and instead accept a new Proposition 13 base year reassessment. By doing so in this circumstance, the reassessment can result in lower property taxes over time by locking in the lower market value as the property’s new base year value as of the date of transfer.Otherwise, the higher original Proposition 13 base year value set under the transferor’s ownership would someday be reinstated as market conditions improve over time and at a level higher than they would be if the property had received a new Proposition 13 base year value as of the date the property was transferred.In any case, you may wish to consult with a real estate or estate planning expert for advice before claiming this exclusion.
Who are considered eligible children under Proposition 58 and grandchildren under Proposition 193? A “child” for purposes of Proposition 58 includes:
- Any child born of the parent(s).
- Any stepchild while the relationship of stepparent and stepchild exists.
- Any son-in-law or daughter-in-law of the parent(s).
- Any adopted child who was adopted before the age of 18.
Spouses of eligible children are also eligible until divorce or, if terminated by death, until the remarriage of the surviving spouse, stepparent, or parent-in-law.
An eligible “grandchild” for purposes of Proposition 193 is any child of parent(s) who qualify as child(ren) of the grandparents as of the date of transfer.
Are my grandchildren eligible transferees of my property for purposes of Proposition 193 if my daughter passed away and she was divorced from her husband (my ex-son-in-law) who is still living?Yes. Your daughter’s divorce terminated the relationship between you and your son-in-law. Since your ex-son-in-law is not considered your child for purposes of this exclusion, your grandchildren are eligible transferees of your property.
Are my grandchildren eligible transferees of my property for purposes of Proposition 193 if my daughter passed away and her husband (grandchildren’s father) has not remarried? No. Your son-in-law is still deemed to be a “child” of yours, until he remarries, thus disqualifying your grandchildren as eligible transferees.