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3 Tax Issues to Consider in Estate Planning – Property Taxes

3 Tax Issues to Consider in Estate Planning – Property Taxes

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Many people engage in their own estate planning without understanding the significant tax consequences that result.  We have previously written about how estate planning can affect income taxes and estate taxes.  This article introduces the impact estate planning can have on property taxes.

California Property Taxes

Property taxes are the primary source of revenue for California counties, cities, and schools.  Property taxes are annual taxes paid by real property owners to local governments and are based on the assessed value of the property, i.e., the taxable value of a property against which the tax rate is applied.  In 1978, California voters passed Proposition 13, which generally limits annual increases in assessed value to no more than 2 percent, except when property changes ownership.  Upon a change in ownership, the county has an opportunity to reassess the property to a new base year value, typically, the fair market value on the date the property was purchased or underwent a change in ownership.

A change in ownership occurs when there is a transfer of an interest in real property.  Transfers are often the result of a sale, gift, or inheritance.  Due to California’s rapidly appreciating real estate market, property owners do their best to avoid changes in ownership and its resulting reassessment.  However, if a change in ownership cannot be avoided, then an exclusion to reassessment can be its saving grace.

An important exclusion to reassessment was codified with the passage of Proposition 58 in 1986.  Under Proposition 58, transfers of real property between parents and children were excluded from reassessment.  Prior to 2021, Proposition 58 was often relied upon in the context of estate planning where changes in ownership often occurred between parent and child.  Before 2021, children who inherited property from their parents were often allowed to keep their parent’s low assessed value.

Proposition 19

In 2021, Proposition 19 went into effect and severely limited the parent-child exclusion.  Whereas Proposition 58 applied to changes in ownership between parent and child, Proposition 19 only applies to transfers of a primary residence and only excludes from reassessment the first $1 million over the assessed value.   Any value above the $1 million limit is reassessed at market value.

For example, Dad purchased his primary residence in 1995 for $300,000.  Dad passed away in 2025.  Pursuant to Dad’s trust, his home goes to Son.  Because of the limitations imposed by Proposition 13, the assessed value of Dad’s home at the time of his death was only $400,000 even though the fair market value of his home was $1.5 million.  Prior to Proposition 19, when Son inherits the home, the change in ownership qualified for Proposition 58 reassessment exclusion for transfers between a parent (Dad) and child (Son).  Accordingly, Son’s assessed value would have been $400,000, the same as Dad’s assessed value.  However, since the change in ownership (i.e., Dad’s death) occurred after Proposition 19, then Son’s assessed value is $500,000.  Son’s assessed value starts at $400,000.  The first $1 million above the assessed value is excluded ($400,000 to $1,400,000).  The value above $1,400,000, i.e., $100,000 is added to $400,000 for a final assessed value of $500,000.

Planning Opportunities

Estate planning often involves the transfer of real property whether into a revocable trust, as a gift during a donor’s lifetime, or as an inheritance upon the transferor’s death.  All such transfers fall under the definition of a change in ownership and are subject to reassessment unless an exclusion applies.  Transfers to a trust that is revocable by the trustor qualifies for an exclusion.  However, gifts and inheritances often do not qualify for an exclusion and will likely be reassessed, resulting in a significantly increased property tax bill.  You can read more about property tax planning to minimize or avoid future property tax reassessment by clicking here.

To determine whether property tax planning is right for you and your family, the following should be considered:

  • Amount of Reassessment. If a reassessment of your property to fair market value (FMV) will result in a significant increase in property taxes, then property tax planning may save your family in the long run.
  • Time Horizon. Property tax planning can often tax years.  Do you have the time to execute a plan that may take 2 to 3 years?
  • Plan After Death. Do your beneficiaries intend to keep the property?  If not, then there is no need to worry about a reassessment.
  • Complexity. Property tax planning often requires the formation of LLCs, deed transfers, and additional tax returns.  Do you have the appetite for complex strategies?
  • Risks. Our firm has assisted clients with property tax planning for almost 20 years.  However, Proposition 19 has only been in effect since 2021.  Although our strategies have been successful, there is no guarantee that the same type of planning that has worked for many years will continue to work under Proposition 19.

Conclusion

In California, transfers of real property should not be taken lightly.  Real property owners should discuss any transfers with an attorney knowledgeable about property tax reassessment.  Those who want to avoid a reassessment should carefully weigh the benefits of property tax savings against the costs of property tax planning.

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By Tiffany Chiu | Posted on April 28, 2025