All About Taxes with an Estate Planning Flair: Part III

In Part I of this series on taxes, we discussed federal taxes, and in Part II, we discussed state taxes. For Part III, we will discuss local taxes in California and generally. In California, local taxes are typically handled through the county tax assessor/collector. We will specifically discuss property taxes and taxes on the transfers of property.

Local Taxes: Property Tax

Property taxes are an annual tax on real property based on the property’s assessed value. When you first purchase property, the assessed value equals the purchase price. After the purchase, the assessed value increases each year according to the rate of inflation, which is the change in the California Consumer Price Index – at least, that was the law before 1978.

In addition, most communities add “Mello Roos” taxes to your bill, which are taxes proposed by voter initiatives to pay for local community projects such as new school stadiums, school upgrades, park or community pool upgrades, library funds, new firehouses, etc. These Mello Roos are a small percentage of the assessed value of your home, usually a fraction of the base taxes.

Homeowners in California can claim a Homeowner’s Exemption on their primary residence, which reduces the assessed value by $7,000, saving approximately $70 per year on taxes.

Proposition 13

In 1978, voters in California limited property taxes. It limited general property taxes (the base tax) to 1% of the property’s value per year and it limited the increases in assessed value to 2% per year. This means that the property’s market value can grow much faster than the assessed value, which is capped at only 2% a year – the assessed value is no longer tied to inflation, as discussed above.

Under Proposition 13, which is still in effect, a reassessment would only occur on a transfer of the property, and at that time, it would reassess to fair market value. In addition, if only a partial transfer occurs (i.e., selling or gifting half of a property), then there is a partial reassessment. This is also true if there is new construction; any substantial improvements will result in a partial or complete reassessment of the property’s value for tax purposes.

In 1983 the tax law was amended to include that any transfers between spouses, such as adding a new spouse onto the deed, removing a spouse from the deed during divorce, or changing ownership between spouses to qualify for a mortgage, would be considered an exemption from a change in ownership affecting reassessment.

Proposition 58

In 1986 voters approved Proposition 58, which created exemptions for certain transfers so that they did not trigger a reassessment. Proposition 58 stated that real estate transferred from parents to children or children to parents would be excluded from reassessment. Specifically, a primary residence of any value was excluded entirely, plus an additional $1,000,000 of transfers (assessed value, not market value). That $1,000,000 and the primary residence was per parent and per child. This exclusion was not automatic, and there must be a timely filed claim for exclusion from reassessment filed with the Assessor’s office.

Propositions 60 & 90

Proposition 60 was also passed in 1986 and allowed homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home if the replacement home was of equal or lesser value, was located in the same county as their current home and was purchased within two years of the sale of their previous home.

Proposition 90 was passed closely behind Proposition 60 in 1988 and allowed homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home if the replacement home was located in a different county, provided that the new county allowed the transfer. There were only ten counties that allowed intercounty transfers.

Proposition 193

Proposition 193 was passed in 1996 and expanded Proposition 58 to include a grandparent to grandchild transfer. This transfer only works one way, unlike the parent to child /child to parent exclusion. In addition, this transfer applies only to specific situations where the grandchild’s parents are no longer alive; essentially, the parent generation is missing.

Proposition 19 – Current Law

The current law regarding property taxes, changes in ownership, and excluded transfers was overhauled in 2020 with Proposition 19. Under Proposition 19, transfers between parents and children or grandparents and grandchildren are now limited solely to a primary residence or family farm, with an inflation-adjusted cap of $1,000,000 in market value (meaning any value over the assessed value + $1,000,000 will be reassessed). The child or grandchild receiving the property must also make the property their primary residence, or the property will be reassessed.

Although Proposition 19 severely limited Propositions 58 and 193, it also greatly expanded Propositions 60 and 90. Now, any homeowner over the age of 55 can transfer their tax base to a new home anywhere in the state, with no county restrictions, a total of three times, and the replacement home can be of any value, not just equal or lesser value. However, if the replacement home is greater than the adjusted value of the original house, the base value can still be transferred, but any excess value will be added to the assessed value for tax purposes.

Local Taxes: Transfer Tax

Property transfer taxes are county taxes resulting from a property’s sale. All counties charge the same tax rate of $1.10 per $1,000 or $0.55 per $500. Many cities and counties have the authority to add additional transfer taxes on top of standard rates. There are only a handful of municipalities that charge additional transfer taxes, not surprisingly, most of them are in the San Francisco Bay Area. Transfer taxes are usually calculated on the face of the deed transferring property and are paid at the close of the sale, typically in escrow.

This concludes the series on taxation and how it relates to estate planning. Please reach out to your estate planning attorney or certified public accountant if you need to know how taxes affect your specific situation.

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