By: Cathy Strini
As real estate agents, it is our fiduciary duty to act in the best interest for our clients. This requires us to constantly expand our areas of expertise.. from termite infestations to mortgage applications, we deal with it all! We also realize the value in sharing our acquired knowledge and educating our clients (and blog-readers). Knowledge is power..and often can lead to saving you or your loved ones thousands of dollars! Today we will be introducing Propositions 58 and 193 and their significance in the current real estate market.
In California, real property* is reassessed at market value if it is sold or transferred. A home is generally taxed at 1% of it’s assessed value, meaning that in today’s market your property taxes may increase dramatically following a reassessment.
For example: Imagine you bought your home in 1996 for $110,000. The original property tax would be $1,100 a year. Assume that you now want to sell or transfer the home and it is worth $1 million in the current market. The new owner would pay property tax on $1 million, or $10,000 the first year.
If you are selling your home to stranger, this increase in property tax probably means nothing to you. However, if you are looking to transfer your home to your child or grand-child this significant increase in annual property taxes may be off-putting.
Introducing Propositions 58 & 193 (codified by Section 63.1 of the Revenue and Taxation Code):
These constitutional initiatives provide property tax relief for real property transfers from parents to children (58) and from grandparents to grandchildren (193). Essentially, Props 58 and 193 exclude these home transfers from reassessment which makes it easier (and more affordable) to keep property in the family.
This exception, however, is contingent upon certain conditions, namely that the proper application is filled out within 3 years of the transfer date. We want to highlight a few of the other requirements/stipulations of the propositions.
- Transfers of primary residences have no value limit. So, even if your home is worth $4,000,000 in the current market, your child may still pay taxes as if it is still worth the $450,000 you originally paid for it. It is important to know, your primary residence does have to have a Homeowners exemption recorded on title prior to the transfer to reap this benefit. Note: The amount that is taxed can be increased by a maximum of 2% each year. Thus, the property tax may have increased since you first purchased the home.
- If you are transferring property that is not your primary residence, the first $1 million is exempt from reassessment. This means that while multiple non-residence properties may be transferred, the cumulative exclusion amount may not exceed $1 million. Note: The million dollar exclusion applies separately for each transferor. Thus, there is a $2 million limit to property owned by an eligible married couple.
- Eligible children are defined as:
- Any child born of the parents
- Any stepchild while the relationship of stepparent and stepchild exists
- Any son-in-law or daughter-in-law of the parent(s). 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.
- Any adopted child who was adopted before the age of 18.
- 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.
- Transfers by sale, gift or inheritance qualify for the exclusion. The person doing the transfer, who can only be the parent or the child, must own the home.
- Important note for Prop 193: The parent of the grandchild must be deceased as of the date of the transfer.
A little research could save your children or grandchildren a significant amount of money! However, we have worked with enough families to know that sometimes the worth of a family home is not just weighed in it’s market value, but in the memories and love it also holds. Make it easier to keep property in the family by taking advantage of Props 58 and 193.
Remember, the exclusion does not happen automatically. You must complete a “Claim for Reassessment Exclusion for Transfer between Parent to Child” (Prop 58) or a “Claim for Reassessment Exclusion for Transfer from Grandparent to Grandchild” (Prop 193) form within 3 years of the transfer. Copies of each form are attached below. For more detailed information, check out the sites below. Feel free to fact-check and let us know what additional facts you would have liked us to include.
*Real property is defined as any property that is attached directly to land, as well as the land itself.