The Grandparent-Grandchild Reassessment Exclusion – It Isn’t For Everybody
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When a property owner passes away, in most cases, the property tax that the decedent had been paying (based roughly on the decedent’s purchase price of the property, adjusted annually) automatically increases.1 That is, unless a property tax exclusion applies, which can allow the new owner of a decedent’s property to enjoy the same lower property tax rate that the decedent had previously paid. The most common of these tax exclusions is the parent-child exclusion – which applies broadly to most property transfers at death between parents and their children. But another tax exclusion – the grandparent-grandchild property tax exclusion – is far more selective in its applicability.
This exclusion applies to changes in ownership between grandparents and their grandchildren of:
- A principal residence (of any value); and
- The first one million dollars ($1,000,000) of other real property.2
This means that the tax basis of such principal residence (and the first $1,000,000 of a non-principal residence) will not be reassessed, but will remain at the level previously paid by the grandparent. Thus, this exclusion can result in significant tax savings for the grandchild who intends to keep the property and use it as his/her primary residence or keep it for investment purposes.
However, there are exceptions to this rule. First, the principal residence exclusion will not apply if the grandchild has already received a principal residence exclusion from his or her parent; in this case, the grandparent’s principal residence is considered other real property, and only the first $1,000,000 of the grandparent’s principal residence will be excluded. Additionally, both parents of the grandchild must be deceased at the time of the transfer to the grandchild. Indeed, even if a living child of a grandparent gives away his or her interest in the grandparent’s property, the transfer will still not qualify for this exclusion. This also means that the stepparent or in-law child of the grandparent must also be deceased or remarried at the time of the transfer. And, unlike the parent-child exclusion under Proposition 58 where the exclusion can apply in either direction, from parent to child or child to parent, the grandparent-grandchild exclusion only applies in one direction: from a grandparent to a grandchild.
Finally, keep in mind that this tax reassessment exclusion may only apply if it is timely filed: (1) within three years of the transfer or before any transfer to a third party; or (2) within six months of receiving a notice of supplemental or escape assessment, if notice is mailed after the expiration of the above-mentioned deadline; or (3) if notice of supplemental or escape assessment is mailed before the termination of the three-year period to file, the grandchild still has until the end of the three-year period to timely file for the exclusion.
Thus, if these strict requirements are met, those grandchildren can enjoy a very significant tax savings on property transferred to them by the death of their grandparents.
1The basis is increased to a tax based on the current fair market value of the property, which can result in an enormous tax increase.
2California Proposition 193.