PROPERTY TAXES & THE PARENT-CHILD EXCLUSION

Recently, I encountered several instances where a child who inherited property from their parents failed to obtain the parent-child exclusion from reassessment for property tax purposes because the estate was handled without an attorney or by an attorney who does not usually do estate planning. It made me aware of the need to educate people regarding this valuable right.

California allows parents to pass real property on to their children without the property being re-assessed for property tax basis. Parents are allowed to pass on a personal residence and $1 million dollars worth of other property to children in this manner. Considering what the value of California real estate has done in the past ten years, you can imagine what a huge benefit this can be for children. However, in order to this exclusion to apply, the proper forms must be filed with the assessor’s office in the county where the property is located within three years of the transfer and the property must go directly from parent to child.

Problems often arise when parents leave their property to children in equal shares, but only one child actually wants to keep for example a residence. If that property is transferred equally to all siblings and then one child buys out the others; that purchasing child will lose the exclusion for reassessment for the percentage of the fair market value of the property purchased from his or her siblings.

This problem can be avoided. If the estate representative takes out a loan on the property, pays off the siblings not interested in the property and the interested sibling takes the whole property directly from the estate, then that sibling will receive a complete exemption from reassessment of the property. The child that receives the property (subject to the loan) will pay property taxes based on the last value that was assessed during the parent’s ownership period.