Gifting to your children is a wonderful way to get property out of your estate but one thing that concerns both parents and children is the property tax aspect. Does your gift mean that the property taxes will increase? Will your children be able to retain the property if property taxes skyrocket? Well good news, there is an important exemption to the reassessment of property if it is a result of a transfer from a parent to a child. The exemption is $1,000,000 per person making the gift for rental or investment property, or, an unlimited amount for the transferor’s principal residence. Even better, the $1,000,000 is not based on fair market value, it’s based on the amount listed on the assessment roll (reflected on your property tax bill) which is typically much lower than the fair market value. For example, if you and your spouse have an apartment or commercial property with a fair market value of $4,000,000 but a property tax bill value of $2,000,000, you can each take advantage of this exemption and transfer it to your child or children with no reassessment and avoid increased property taxes.
If you are a grandparent and your child is deceased you are able to “step into the shoes” of your deceased child and transfer the same $1,000,000 to your grandchild or grandchildren without reassessment concerns.
This exemption does not work for partnerships that contain real property. If your intention is to convert rental property to a partnership interest with you or you and your spouse and your children as partners you must go through a two step process. First, you should transfer the property to your child or children using the allowable property tax exemption. Be sure it is recorded with the County Assessor’s office. The second step is for both you and your spouse (if applicable) to transfer the property to the partnership simultaneously with your children transferring their interest in the property to the partnership. As long as the percentage of interest in the property owned personally by everyone is identical to the interest that each individual will own of he partnership there is another exemption that states that the transfer is not a change in ownership and so not subject to reassessment.
Transferring property to a child is a valuable tool for estate planning but make sure you structure your gift to avoid property tax reassessment!
For more information, contact LSL CPAs at 714.672.0022.
