Property Tax Reassessment and Exclusion for a Parent-Child Transfer
Maria owns a single-family home in Los Angeles County that she purchased in 2000 for $300,000. The home has a base year value of $350,000 (after adjustments) and a current assessed value of $400,000. In 2023, Maria transferred the home to her daughter, Lucia, as a gift. At the time of transfer, the home's fair market value was $1,200,000. Maria continued to live in the home after the transfer and did not pay rent. Lucia owns a condominium in San Diego County that she purchased in 2015 for $500,000 and uses as her principal residence. Lucia intends to move into the Los Angeles home and sell the condominium. Maria filed a claim for the parent-child exclusion from change in ownership under R&TC §63.1. The Los Angeles County Assessor denied the claim, stating that the exclusion does not apply because Lucia did not occupy the home as her principal residence at the time of transfer, and because Maria continued to live there. The Assessor also noted that the home's value exceeds the exclusion limit.
1. Evaluate the Assessor's denial of the parent-child exclusion. What are the requirements for the exclusion, and does Maria's continued occupancy disqualify the transfer?
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Under R&TC §63.1, a transfer of a principal residence between parents and children is excluded from change in ownership if certain conditions are met. The exclusion applies to the transfer of a principal residence of the transferor (Maria) to the transferor's child (Lucia). The property must be the principal residence of the transferor at the time of transfer, and the transferee must file a claim for the exclusion. The transferee is not required to occupy the property as a principal residence at the time of transfer; however, if the transferee does not occupy it as a principal residence, the exclusion may be limited. For transfers occurring on or after February 16, 2021, the exclusion for a principal residence is available only if the transferee (Lucia) files a claim and the property is the principal residence of the transferor. The transferee's occupancy is not required for the principal residence exclusion, but the transferee must file a claim. The Assessor's argument that Lucia did not occupy the home at the time of transfer is not a valid reason to deny the exclusion, because the statute does not require the transferee to occupy the property at the time of transfer. However, the Assessor's argument that Maria continued to live there is also not disqualifying; the transferor's continued occupancy is permitted, and in fact, the property must be the transferor's principal residence. The Assessor's claim that the home's value exceeds the exclusion limit is partially correct: for transfers on or after February 16, 2021, the exclusion for a principal residence is limited to the first $1 million of the property's value, plus the transferor's base year value. The home's fair market value is $1,200,000. The exclusion applies to the sum of the base year value ($350,000) plus $1,000,000, which equals $1,350,000. Since the fair market value ($1,200,000) is less than $1,350,000, the entire property qualifies for the exclusion. Therefore, the Assessor's denial based on value is incorrect. The exclusion should be granted, provided Lucia files a timely claim. Maria's continued occupancy is not a disqualifying factor. The Assessor's denial is likely incorrect on all grounds.
2. If the exclusion is granted, how should the property's assessed value be determined after the transfer? What if Lucia later sells the property?
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If the parent-child exclusion is granted, the transfer is not a change in ownership for property tax purposes, so the property's base year value is not reassessed. The property retains Maria's base year value of $350,000, adjusted for inflation. The assessed value for the 2023-2024 fiscal year would be the base year value plus the annual inflation adjustment (up to 2%). Assuming no prior adjustments, the assessed value would be approximately $350,000 plus adjustments. The home's fair market value of $1,200,000 is not used for assessment as long as the exclusion applies. However, if Lucia later sells the property to a third party, that sale will be a change in ownership, and the property will be reassessed at its then fair market value. The parent-child exclusion does not carry over to a subsequent sale to a non-qualifying person. Additionally, if Lucia moves into the home and makes it her principal residence, she may be eligible for a homeowner's exemption, but that does not affect the base year value. If Lucia sells the condominium, that sale will be a change in ownership for the condominium, and it will be reassessed at its fair market value. The condominium's base year value is $500,000; if sold for $700,000, the new assessed value will be $700,000. Lucia should be aware that the exclusion for the Los Angeles home is not a permanent exemption from reassessment; it only applies to the parent-child transfer. The Assessor should reflect the exclusion and maintain the base year value. If the Assessor denies the claim, Maria or Lucia can file an application for reduction with the Assessment Appeals Board within the applicable time frame.