Home is Where the Heart Is, and Also the Property Taxes

For many people, real estate is among their most valuable assets and a primary concern when considering how to distribute assets to heirs.

Why Transfer Real Estate?

Transferring real estate during your lifetime can be an effective way to take advantage of your federal gift tax exemption, particularly if you may be interested in relocating as part of your retirement or otherwise changing residences. As opposed to a sale transaction, transferring of a property often does not require reassessment of the property and therefore can be a way to more easily keep a vacation home or other sentimentally valuable property in the family with lower costs to the inheriting child.

When deciding whether a real estate transfer makes sense, it’s important to consider what you and your family’s future plans are for the property and whether the property is or will be your primary residence. Depending on the jurisdiction where the property is located, transfers of primary residences are typically subject to more favorable conditions than other real estate. For example, if you were considering retiring to what had previously been a vacation home and turning it into your permanent residence for some time, making the transfer after it has been established as your primary residence would make more sense. This may make the transfer of your original residence less appealing, however, so you would want to consider which property you wanted to prioritize.

Changing Regulation For Californians May Mean The Time to Transfer is Now

One additional and particularly time-sensitive consideration for California residents is Proposition 19, set to go into effect in mid-February 2021. Under current law, individuals can transfer a primary residence of any value and up to $1M of assessed value (or up to $2M per couple) of other real property to their children without reassessment. Primary residences do not need to become the primary residence of the transferee, only of the owner transferring the property. A transfer to a child of California real estate to avoid property tax reassessment is often called the Parent-Child exclusion.

If you would like to take advantage of the favorable conditions of the current regulatory landscape, the time to act is now. Any transfers hoping to avoid the changes under Proposition 19 must be in place by Friday, February 12th.

Under Proposition 19, parent-to-child real estate transfers will trigger reassessment unless the property transferred is the primary residence of the transferring party and will become the primary residence of the transferee. Even if these conditions of residency are satisfied, any market value exceeding the current taxable value plus $1M will still be subject to reassessment. Transfers of second homes or any property other than a principal residence will become subject to reassessment. This change is especially significant for properties that you and your family consider irreplaceable – the cherished family lake house, the building that has been home to the family business for generations, or other properties that may be most meaningful and important for you to keep in the family. In contrast, properties that are likely to be sold at some point should be a lower priority for transfer before Proposition 19 goes into effect, as the impact of reassessment will ultimately fall on the buyer.

While Proposition 19 does eliminate some previous advantages associated with transferring property to your children, it also may have some benefits for you as well. Currently, people over age 55 or those with severe disabilities can transfer the assessment on their primary residence to a new primary residence only within the same county and to a property of equal or lesser value. This transfer can also only be done once. Under Proposition 19, you will be able to transfer your assessment to a new property anywhere in the state and to a property of greater value (with an upward adjustment). You will also be able to make this transfer up to three times.

Your Wetherby Team is Available to Help

While transfers of significant property like real estate can involve a lot of moving parts, your Wetherby team is available to direct you to the resources you need to complete any transfers in the next few weeks, and we look forward to discussing your broader estate planning needs.

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