Beginning February 16, 2021, only the first $1,000,000 of taxable value can be excluded from reassessment of a transfer of a principal residence by a parent to a child. Additionally, the child must use the home as their principal residence immediately following the transfer.
Let’s look at an example: Henry and Wanda’s principal residence, purchased in 1970, is currently assessed at $400,000, and the corresponding property tax is $5,000. Today, the fair market value of the home is $2,500,000. Prior to Prop. 19, when Henry and Wanda’s daughter, Sally, inherits the property, because of the parent-child exclusion under Prop. 58, Sally pays the same property tax as Henry and Wanda paid. Under Prop 19, however, Sally’s tax bill would be about $18,000, substantially more than Henry and Wanda were paying, and that is only if Sally uses the family home as her principal residence.
The solution? Henry and Wanda could consider gifting the property to Sally right now, prior to the change in the law. Henry and Wanda would be required to file a gift tax return. However, a lifetime gift would not receive a step-up in basis on Henry and Wanda’s death as it otherwise would have.
