California homes passed down from parents to their children carry potential property tax savings worth thousands of dollars a year.
Thanks to a state proposition that took effect in 1986, known as the "parent-child reassessment exclusion," a child can inherit a parent's principal residence, whether modest or worth millions, without triggering a reassessment for property taxes.
In general, a transfer of ownership -- except from one spouse to another -- leads to a reassessment and, given the tremendous appreciation of real estate in recent years, a hike in property taxes.
With the reassessment exclusion, a child who inherits a home in which a parent has lived for 35 years, for example, would also inherit the low tax assessment and annual tax bill. The home could have a market value of $800,000 but an assessed value of $85,000, kept low by limits on increases established by Prop. 13 in 1978. The inheritor would have an annual tax bill of about $850 with the parent-child reassessment exclusion, rather than about $8,000 with a reassessment.
"It's a great program," said Sharon Ferguson, assistant division chief with the San Diego County assessor's office, because it helps heirs keep family homes in pricey Southern California. "Otherwise, they may not be able to afford to keep the home."
Inherited homes qualify for the tax break, whether the children use them as principal residences or as rentals. And the break applies not only to a parent's principal residence, but also to any other inherited real estate, whether commercial or rental, valued up to $1 million.
Though the property transfer covered by the law is typically from parent to child, it can also be from child to parent. Under California's Prop. 193, property is eligible if the transfer is between grandparent and grandchild -- but only if both parents of the grandchild are dead.
The parent-child transfer can occur while a parent is alive, although most usually happen after a parent has died.
When more than one child is inheriting, getting the maximum from the reassessment exclusion lies in the estate-planning details, according to the experts.
Consider a hypothetical scenario in which an elderly woman dies, leaving her estate to three daughters to be divided equally among them. Her $600,000 house is the estate's largest asset.
Two of the daughters want to sell the house and receive cash, while the third, who served as the mother's caregiver, wants to buy out her sisters. If they transfer their interests to her, however, two-thirds of the parent-child reassessment exclusion has been wiped out.
"The exclusion is parent to child, not sibling to sibling," explained Gregory Smith, San Diego County assessor.
A parent with significant assets can avoid that situation by dividing the estate into three parts -- the house for one child and other assets of equal value for the other two siblings.
The exclusion is not automatic. A claim must be filed with the local assessor's office within three years of either the date of transfer or death, or before the sale of the property to a third party. For a claim filed after three years, a reassessment exclusion can be granted starting the year the claim is filed, but no refunds will be issued. County officials may ask to see a parent's will or trust when considering whether to approve a request for a reassessment exclusion.
Though the exclusion is not automatic, the Los Angeles County Office of the Assessor does alert many eligible property owners to the tax break. The office mails them claim forms if they check off the box indicating a parent-child transfer when filing routine, transfer-of-ownership documents with the county.
Los Angeles County approves 47,000 to 65,000 parent-child exclusion applications a year. The two-page claim forms are available at the county assessor's public-service counter or at www.lacountyassessor.com.