Did you know that grandparents can transfer their home (or family farm) to their grandchildren without having the property reassessed to its market value and avoid paying higher property taxes?
In November 2020, California voters approved Proposition 19 which provided what is known as an “intergenerational transfer exclusion” that allows the taxable value of a property to remain the same for the person receiving the property (the transferee) as that of the person transferring the property (the transferor), provided certain conditions are met. “Taxable value” means the property’s base year value plus inflationary adjustments, commonly referred to as the factored base year value.
When properties changes ownership, the law typically requires the properties be reassessed to current market value, which can significantly increase the assessed value and the amount of property taxes owed. An intergenerational transfer exclusion prevents a family home (or family farm) from being reassessed, which can avoid a property tax increase.
Revenue and Taxation Code (R&TC) section 63.2, which implements the intergenerational exclusion provisions of Proposition 19, allows the family home or family farm to be transferred between grandparents and grandchildren without reassessment, with some market value limitations. The exclusion applies to such property transfers on or after February 16, 2021. For real property transfers that occurred before February 16, 2021, see Publication 800-2a information sheet, Property Tax Savings: Transfers from Grandparents to Grandchildren Occurring On or Before February 15, 2021.
Note: Proposition 19 allows transfers from grandparents to grandchildren and from grandchildren to grandparents.
Potential for Tax Savings
Property taxes are based on the assessed value of property. For purposes of California property taxation, real property is reassessed at market value when sold or transferred. As a result of a sale or transfer, the property’s assessed value can sometimes increase significantly, resulting in higher property taxes due each year.
If the market value of the property at the time of the sale or transfer is more than the property’s factored base year value, then receiving the grandparent-grandchild transfer exclusion will result in savings for the transferee (for example, grandchild) because the property taxes would be based on the lower value.
If the exclusion is granted, the grandparent’s factored base year value as of the date of transfer will be the same for the grandchild, as long as the property’s current market value does not exceed the factored base year value plus $1 million. If the market value exceeds this limit, the difference is added to the factored base year value, resulting in a new taxable value for the transferee’s property.
The exclusion is available only under the following conditions:
The family home must have been the principal residence of the transferor (for example, a grandparent).
The transferee (for example, a grandchild) must live in the home as their primary residence within one year of the transfer and must continue to occupy the family home.
The transferee (for example, a grandchild) must file for the homeowners’ or disabled veterans’ exemption on the residence within one year of the transfer. If the property was transferred to two or more grandchildren, and one moves out and another moves in, a new claim must be filed within one year of the previous grandchild’s move-out date.
A family farm must be under cultivation or being used for pasture or grazing, or to produce any agricultural commodity (plant and animal products produced for commercial purposes); there is no requirement that a family home be on the property.
The grandparent-grandchild exclusion is available on transfers between grandparents and their grandchildren as long as:
The grandchild’s parents are deceased prior to the transfer, or
The grandparents’ child is deceased, and the surviving in-law parent has remarried prior to the date of transfer.
Grandchild is defined by R&TC section 63.2(e) as a child of the child of the grandparent. A child can be a biological or an adopted child, a stepchild, an in-law child (for example, daughter-in-law), or a foster child, in limited cases.
Helpful Hints:
If the property was inherited as a result of a death, the date of death is considered the date of transfer for property tax purposes, not the date the property was distributed. Keep this in mind to ensure you file the claim form timely.
If the property owned by the grandparent is transferred to the grandchild and the grandchild’s parents are still living, the property will be reassessed at market value on the date of transfer.
If the property owned by the grandparent is transferred to the grandchild and the grandchild’s parents are deceased, but a stepparent is still living, the property is eligible for exclusion.
If a grandchild’s parents divorced and the only living parent is not the child of the grandparents, then the transfer by the grandparent to the grandchild is eligible for exclusion.
There is a value cap (or limit) to the excluded amount, equal to the property’s factored base year value at the time of transfer plus $1 million; the amount above the cap is added to the transferred factored base year value.
Beginning in 2023, the $1 million allowance will be adjusted annually by an inflation factor, which will benefit taxpayers because a higher amount will be excluded from reassessment.
A family farm comprised of multiple legal parcels may be eligible for an exclusion for each parcel. The legal parcel containing a family home may qualify separately for the exclusion.
A transfer of property can occur by purchase or gift; it can also occur through a trust. For example, if a grandparent’s property is put into a trust where upon the death of the grandparent, the grandchildren are the beneficiaries of the trust, a transfer occurs as of the date of death.
The exclusion applies to a family home that continues as a family home by an eligible transferee or a subsequent eligible transferee. Once it is no longer the family home, such as becoming a rental property, the exclusion is removed. A new value is established as of the January 1 lien date following the transferee’s move-out date based on the property’s market value as of the date the transferee obtained ownership, adjusted annually for inflation.
There is no limit to the number of times a family home or a family farm may be transferred under the grandparent-grandchild exclusion.
If multiple grandchildren inherit the family home, only one of the grandchildren needs to live in it. If that grandchild moves out and another grandchild moves in within one year of the move-out date, the exclusion will continue. (Note: The other grandchild must also file for the homeowners’ or disabled veterans’ exemption.)
If you are 55 or older, and selling your principal residence to your grandchild, your grandchild can benefit by transferring your taxable value to them under the grandparent-grandchild exclusion. However, you cannot also transfer that same taxable value under section 69.6 (commonly referred to as a base year value transfer) if your buy a replacement property.
If the market value of the transferred property is less than its factored base year value at the time of the transfer, then claiming the exclusion would not be beneficial.
The grandparent-grandchild exclusion applies to real property transfers between grandparents and grandchildren; it does not apply to transfers of legal entities. For example, if your grandmother owns ABC Company that owns an office building and she transfers all of her partnership interests to you, her grandson, the transfer will not qualify for exclusion from reassessment.
How to apply for the grandparent-grandchild exclusion:
Complete form BOE-19-G, Claim for Reassessment Exclusion for Transfer Between Grandparent and Grandchild Occurring On or After February 16, 2021. Obtain the claim form from the County Assessor’s Office where the property is located. Submit the completed form to the same office.
When to file your claim:
To qualify for relief from the date of transfer, the claim must be filed with the County Assessor within three years of the transfer date, but before transferring the property to a third party. However, a claim is also considered to be timely filed if filed within six months after the date of mailing of the County Assessor’s supplemental or escape assessment notice issued for the transfer.
If you don’t file the claim on time, you can still obtain relief as long as you still own the property. However, the reduction in property taxes will be applied only for future years, beginning with the year that the claim is filed.
If the property is a family home, a BOE-19-G claim cannot be filed before filing a claim for the homeowners’ exemption or disabled veterans’ exemption. Remember, you must file for one of these exemptions within one year of the date of transfer.
