August 10, 2012

Parent-Child Exclusion

One of the most common property tax exemptions is the parent-child exclusion. The exclusion allows a parent to transfer their residence plus other property to their child without property tax re-assessment, or in the correct legal terminology, the transfer does not constitute a "change of ownership." 

The amount of property that can be transferred from parent to child is quite large. Each parent may transfer their personal residence plus up to $1M in full cash value property to the child or children without a change in ownership. Cal Const art XIIIA, §2(h); Rev & T C §63.1. It should be noted that "full cash value" does not mean "fair market value" rather it means means "assessed value." Cal Const art XIIIA, §2(a); Rev & T C §110.1; City & County of San Francisco v County of San Mateo (1995) 10 C4th 554. Assessed value is the figure listed on your property tax bill. As many a homeowner knows, assessed value does not always translate to fair market value because of Prop 13. Thus, a parent could transfer millions of dollars of property to their children if the property has a low assessed value. The following example is illustrative of this.

Wendy was a wealthy widow who owned multiple properties in California. She owned a personal home in Palo Alto, a cabin in Lake Tahoe, a condo in Palm Springs, a beach house in Malibu and a loft in San Francisco. The Palo Alto home's fair market value was $2.5M with an assessed value of $1.2M, the fair market value of the Lake Tahoe cabin was $1.2M with an assessed value of $100,000, the fair market value of the Palm Springs condo was $1.7M with an assessed value of $200,000, the fair market value of the Malibu beach house was $1.8M with an assessed value of $450,000 and the fair market value of the San Francisco loft was $700,000 with an assessed value of $150,000. All of these properties had been purchased by Wendy many decades ago and had substantially increased in value. When Wendy passed away, her children could maintain the property tax basis for each of the properties. For instance, the Palo Alto home, though in excess of $1M, qualified for the personal residence exception and the assessed value of all the other properties did not exceed $1M. Thus, the children would save ten of thousands of dollars on property taxes each year thanks to the parent-child exclusion. 

For reference, the parent-child exclusion form is Form BOE-58-AH and can be found on the website of county assessors.