Parent-Child Exclusion From Property Tax Reassessment
California provides various exclusions from reassessment of property tax when a “change of ownership” occurs. One of the most common exclusions is used to prevent reassessment for transfers from a parent to a child or from a grandparent to a grandchild (often referred to as the “parent-child exclusion”). However, it is important to understand when a “change in ownership” occurs and how long you have to apply for an exclusion from property tax reassessment.
“Change of Ownership”
Generally, Revenue & Taxation Code Sections 60 through 62 define the events (i.e., the sales and transfers) that trigger property tax reassessments under provisions of the California Constitution, commonly known as Proposition 13. These trigger events are known as a change of ownership. Generally, whenever a change of ownership occurs that is not subject to an exclusion provided under the Revenue and Taxation Code, the transferee must file a change in ownership statement in the county where the real property is located. Cal. Rev. & Tax. Code § 480(a).
Revenue and Taxation Code section 60 defines a “change in ownership” as “a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest.” The transfer of a fee interest is commonly accomplished via a sale from one person or entity to another.
Transfers can also be through legal trusts. In fact, transfers between parents and children typically take place through trusts that are set up by the parent(s) for the benefit of the child after the parent passes away. The Revenue and Taxation Code also provides that circumstances constituting a “change in ownership” occur when any interests in real property which vest in persons other than the trustor (i.e., the trust creator) or when a revocable trust becomes irrevocable (such as the parent/trustor passing away).
Thus, there is a change of ownership when the children receive the full present interest in real property, even when the property remains in the trust. Luckily an exclusion is available to prevent a costly property tax reassessment, but must be timely claimed.
The Parent-Child Exclusion
Certain constitutional initiatives (including Propositions 13, 58, and 193) were passed that provide for exclusions to reassessment when the transfer is from a parent to a child or from a grandparent to a grandchild. Those initiatives were codified in the California Revenue & Taxation Code, which states (in relevant part) that “a change in ownership shall not include the purchase or transfer of real property . . . between parents and their children.” Cal. Rev. & Tax. Code § 63.1.
But, in order to avoid reassessment under the parent-child exclusions described above, once there is a change in ownership a claim for the exclusion must be filed within three (3) years after the date of the purchase or transfer of real property, or prior to transfer of the real property to a third party (whichever is earlier). If no claim for a parent-child exclusion is filed within the three (3) year period, then it may be filed within six months from the date of mailing of a notice of supplemental or escape assessment that was issued as a result of the purchase or transfer of the real property. Cal. Rev. & Tax. Code § 63.1.