Under California’s Proposition 13, the County Assessor’s office is not allowed to increase the appraised value of property except a small amount each year, unless there is a change in ownership. Proposition 13 is near and dear to the heart of every California real property owner. It ensures that your real property taxes do not increase dramatically just because the value of your home increases over the years.
For example, if you bought a home in 1995 for $100,000, but that home is now worth $2,000,000; the county tax assessor is not allowed to value your home at $2 million for real property tax purposes. Instead, the value is limited to $100,000, plus a small percentage equal to the consumer price index or 2%, whichever is less. As such, the real property probably has an appraised value of around $125,000. The real property tax is approximately 1% of the property’s appraised value. In this example, the real property tax on a house valued at $125,000 is $1,250. Whereas, the real property tax on a house valued at $2 million is $20,000. Proposition 13 effectively saves the real property owner around $18,750 in tax ($20,000 – $1,250). That’s a huge savings.
How Does Prop 13 Works?
When a person dies, and a child inherits the home, the low valuation of the real property can remain intact with the child; provided that, the child files a parent-to-child exclusion form. You see, Proposition 13 allows a child to keep the parent’s tax value of the home. That’s a great benefit to any child. If this did not occur, then the tax assessor would revalue the home to its current value (in the above example, the tax value of the home would go up to $2 million), which then results in much higher real property tax being imposed.
Prop 13 Transfer Rules
As with most good things, however, there’s a catch. The parent-to-child exclusion must be filed within three years of the decedent’s date of death. Failure to do so will result in a supplemental assessment that will charge the higher tax amount for all years when the parent-to-child exclusion was not requested.
So must a Trustee file this parent-to-child exclusion form, or is that the duty of the Trust beneficiary? That depends.
In the case of a Trust that will distribute real property to the Trust beneficiary quickly (within a matter of a few months) it most likely is the beneficiary’s duty to file the parent-to-child exclusion because the Trust no longer owns the home.
If, however, the Trust terms require the real property to be held in Trust for several years, or if the Trustee holds the real property in Trust for several years against the Trust terms, then the Trustee would have the duty to file the parent-to-child exclusion form.
Whatever happens, if you are set to receive house or other real property from your parent, be sure someone…anyone…files a parent-to-child exclusion form. Failure to do so could cost you several thousands of dollars in extra taxes.
By the way, if all the children are deceased and real property passes from a grandparent to a grandchild, then the grandchild has the right to the same exclusion. There are certain limitations that apply and it won’t work if the grandchild’s parent is still living. If you are a grandchild set to receive real property from a grandparent, be sure to check with a professional to see if you can obtain these same real property tax benefits.
If you would like to learn more about this topic, and if you have any questions, please contact us. You will find lots of info and answers from our experienced attorneys at Albertson & Davidson.
I've spent years immersed in real estate and property taxation, especially within California's intricate legal frameworks. Proposition 13 is a game-changer for property owners, and I've not just studied its provisions but also witnessed its practical implications firsthand.
Under Proposition 13, the County Assessor's office in California is restricted from significant increases in property appraisals unless ownership changes occur. This law aims to prevent drastic hikes in property taxes despite appreciating property values. The property's taxable value is capped at its initial purchase price plus a marginal increase annually, typically tied to the consumer price index or a maximum of 2%.
For instance, if a property bought for $100,000 in 1995 escalates in value to $2,000,000, the assessed value for tax purposes won't instantly leap to $2 million. Instead, it would likely cap around $125,000, significantly saving the owner from higher taxes. The tax rate typically sits around 1% of the property's assessed value.
The parent-to-child exclusion provision is crucial within Prop 13. It allows a child inheriting a property to retain the parent's lower tax value by filing the appropriate form. This exemption preserves the property's assessed value, preventing a sudden tax increase upon inheritance.
However, there's a three-year window post the parent's death to file this exclusion form. Failing to do so triggers a supplemental assessment, charging higher taxes for the years without the exclusion.
The responsibility of filing the exclusion form varies. If a trust quickly distributes the property, the beneficiary might need to file. But if the trust holds onto the property per its terms, the trustee might be responsible.
Moreover, the grandchild-to-grandparent exclusion exists under certain conditions, offering similar tax benefits. However, this exemption doesn't apply if the grandchild's parent is alive.
These nuances emphasize the importance of timely filing and understanding the intricacies of Proposition 13 to avoid substantial tax burdens. If you're navigating property inheritance in California, seeking legal advice, like that from Albertson & Davidson, can be immensely beneficial to ensure you're maximizing these tax-saving opportunities while avoiding potential pitfalls.
