Why is Prop 58 important?
In California, real property is reassessed at market value if it is sold or transferred. This means that if you bought your house for $100,000 in 1967, you're paying taxes on the property at a pretty low amount. But if you sell to a friend for $500,000 today, your friend will be paying higher property taxes because the property will be reassessed at the current value ($500,000). However, if you sell or transfer to a child, the child will get to keep the old assessed tax basis on the original $100,000 property value. This equals huge property tax savings. Proposition 193 passed in 1996 by California voters extends this exclusion to transfers between grandparents and grandchildren if the grandchild's parents (grandparent's children) are dead.
Which properties are excluded?
Transfers of the primary residence (no value limit) and transfers of the first $1 million of real property other than the primary residences. The $1 million exclusion applies separately to each eligible transferor.
Must the transfer be a gift?
No, the transfer can be a sale, gift, or inheritance.
Does a trust affect Prop 58/193 exclusion?
No, the property that is transferred from a trust will be eligible for the exclusion. However, you are well-advised to seek out the services of an experienced estate planner (such as myself) because if your trust contains a "sprinkle/spray" provision and names a beneficiary who is not eligible for the exclusion, like a nephew, then the exclusion will not apply for any beneficiary even if the trustee only gives the assets to a child who would normally be eligible for the exclusion.
If you have any questions about a transfer of real property to a child or relative, please feel free to call my office. Thanks for reading!