How Should Bay Area Property Owners Shield Parent-Child Real Estate Transfers from Increased Tax Assessments?

In 1986 California amended its constitution to allow parents to pass real estate on to their children without subjecting their children to the spike in property taxes that accompanies changes in ownership in areas where real estate values have increased. This is often a significant issue for Bay Area residents who are seeking to pass real estate along to their children.

However, the exclusion from reassessment does not automatically apply to all transactions between parents and their children. In this article, we will take a look at the paperwork that needs to be filed by California residents seeking to take advantage of the exclusion and when it must be filed.

Proposition 58 allowed transfers between parents and their children of a principal residence to be excluded from an ownership reassessment, provided the proper claim is filed with the county where the residence is located. Additionally, other transfers between parents and children of real property with assessed values of up to $1 million may be excluded from reassessment. The $1 million exclusion applies to each transferring parent, so both parents may transfer a total of $2 million to a child.

While the exclusion is often referred to as a Proposition 58 transfer, we should point out that there is also a Proposition 193 exclusion that took effect in 1996 and provides the same benefits to real estate transfers between grandparents and grandchildren when the parents of the grandchildren died before the transfer date.

In approving Proposition 58 and Proposition 193, California voters were seeking to shield inter-generational real estate transfers from the effects of Proposition 13. That proposition replaced annual property value reassessments with reassessments that only occur when a property is sold. It also capped annual increases in assessed value at 2 percent.

Forms for Claiming the Exclusions and Filing Deadlines

Property owners in Alameda County and San Francisco County who are seeking to keep a property from being reassessed after a parent-child transfer must file the proper form with the county within three years after the date of purchase or transfer. The form may also be filed prior to the property being transferred to a third party, if that transfer occurs before the initial three year-filing window expires.

A property owner who has missed those two filing windows has one last opportunity to file the forms if it is done within six months from the mailing date of a notice of supplemental or escape assessment issued by the county.

Each California county issues its own form for claiming a Proposition 58 exemption, but they are always a slightly modified Form BOE-58-AH, Claim for Reassessment Exclusion for Transfer Between Parent and Child. The Alameda County form is available here and the San Francisco County form is available here. Likewise, every county uses a Form BOE-58-G, Claim for Reassessment Exclusion for Transfer from Grandparent to Grandchild. The San Francisco County version of the form is available here, while the Alameda County version is here.

A property owner also must provide the county with proof of eligibility, which may include a copy of the transfer document, trust or will. Should that information not be available at the time the form must be filed, the parties should go ahead and file the form with the information they have and file an amended form once all the necessary information has been collected.

Which Transfers Qualify for the Exclusions?

The transfers that qualify for the exclusions under Propositions 58 and 193 may be the result of a sale, gift or inheritance. Therefore, if your parents sell you their home for less than market value, the transfer will still qualify for the exclusion.

Additionally, a transfer through a trust may also qualify for the exclusion because tax officials will look through the trust to the beneficial owner of the property. If they find the present beneficial ownership of the trust was passed from a parent to a child, the change in ownership is eligible for the parent-child exclusion.

One type of transfer which does not qualify for the exclusions are transfers of real property between a legal entity owned by parents to their children. This rule is important to know because some people seek to protect their home or real estate investments by holding them through limited liability companies (LLCs), or similar entities. If a property is still held by the LLC at the time of the transfer it qualifies as a change of ownership of the LLC, not a change of ownership in the underlying property and the children cannot claim the exclusion.

Non-Principal Residence Exclusion Based on Net Assessed Value

Propositions 58 and 193 allow for the transfer of $1 million in real property to a child or grandchild without triggering reassessment. Significantly, the $1 million assessed value exclusion amount (AVEA) is based on the net assessed value of the property, rather than the fair market value of a property. That means a child or grandchild may claim the exclusion for real estate with a market value of more than $1 million, so long as the property has been assessed at a lower value.

The California Board of Equalization maintains a database that tracks claims for the $1 million exclusion state-wide. The BOE tracks how much of the exclusion a parent or grandparent has used across multiple transfers.

Categorised in: Real Estate

This post was written by Sean Allaband