IMPORTANT CALIFORNIA PROPOSITION 19 CHANGES

Prop 19 went into effect on February 16, 2021, and it has significantly changed the parent/child exclusion for California real property transfers. The parent/child exclusion for property tax transfers was basically be eliminated for all property transfers to children. Meaning any transfers of real property to children after February 15, 2021 will result in the children paying a higher property tax. Kids no longer get to keep mom and dad's low property tax basis. (The only exception is for your residence and only if your children use your residence as their residence, and there is a cap of $1,000,000.)

Until February 16, 2021, we were under the old law. So you can currently gift to children and they get to keep your low property tax. But while the kids get to keep your low property tax, they also take your low capital gains basis. This means that if they ever sell the house, they pay capital gains taxes based on your original purchase price. Remember that if the transfer occurs at your death, as opposed to a lifetime gift, the children get a brand new stepped-up basis for capital gains. This means that if the kids want to sell the property soon after your death, there will be a very low, if any, capital gains tax owed. That can result in hundreds of thousands of dollars in capital gains tax savings.

The bottom line is that when considering making a lifetime gift of real property before the new law goes into effect, you are trading a low property tax for your children in exchange for a higher capital gains tax if your children ever sell the real property. So you would need to calculate whether your children are better off with paying a low property tax over their years of ownership versus your children saving on capital gains taxes if they ever sell the property.

Another important side issue with gifting real property is that you lose control of the property. So, if your children want to sell the property, you no longer have a say in the issue.

If you were planning to gift real property anyway, and your children will never sell the real property, then now is a good time to make the gift. But, if you do not want to give up control of the property and/or your children will sell the property eventually, then giving the property may not be a good idea.

If your situation meets these criteria, contact us - we can help you put together an estate plan that meets your needs.