On November 3, 2020, California voters approved Proposition 19 with just 51.11% of the votes. The change in law limits the tax advantage of passing real estate from generation to generation, but also provides flexibility for select groups looking to move.
How does this affect the transfer of inherited property?
Effective February 16, 2021
A principal residence can be transferred between a parent and child with some benefit if the child claims the residence as his/her own principal residence upon the transfer, and the new $1 million exclusion is claimed within 1 year.
- If these two items occur, the child’s tax basis will be the parent’s tax basis plus the value of the home that exceeds the combination of the parent’s tax basis and a new $1 million exclusion. For example, if the parent’s tax basis is $2 million, but the property is now worth $4 million, the child’s tax basis will be $3 million.
- Previously, transfers were allowed without a tax reassessment regardless of how the child used the property and with an unlimited exclusion.
The Tax Basis of a Principal Residence Receives Limited Advantage
A non-principal residence cannot be transferred between a parent and child without a tax reassessment, with the exception of a “family farm.” In other words, second homes, vacation homes, investment property (residential and commercial) all get a tax reassessment.
- Previously, transfers were allowed without a tax reassessment, subject to a lifetime limit of $1 million.
How does this affect select groups looking to move?
Effective April 1, 2021
People over 55, with certain disabilities, or subject to wildfires/other natural disasters can keep their prior tax basis if their new home is of equal or lesser market value.
- These same groups can also buy a home of greater value, and their new tax basis will be their prior tax basis plus the difference in market values of the two homes. For example, if someone has a tax basis of $2 million, the market value of the home is $3 million, and they move to a $3.5 million home, their new basis would be $2.5 million.
Qualified Individuals Receive a Tax Advantage When Relocating
For those looking to pass California real estate on to the next generation, you may want to consider reaching out to your estate planning attorney as soon as possible, because transfers must be completed by February 15 to be subject to the old rules. While implementing any strategies will need to be done in conjunction with an estate planning attorney, we welcome the opportunity to be your thought partner as you think through how an ownership transfer fits into your financial plan.