-Tax Tip Sheet by Mark W. Bidwell
Real property and land transfers from parent to child and from grandparent to grandchild have documentary tax, property tax and capital gains tax traps and tax savings. This tip sheet identifies the tax issues and documentation needed for death and gift transfers from parent to child in California.
Change in California real estate ownership may incur documentary transfer tax and capital gains tax. Ownership changes may increase future property taxes. For simplicity, in this tip sheet the term “parent-child exclusion” refers to both the parent-child exclusion and the grandparent-grandchild exclusion.
Change in ownership of real property increases the base for property tax. The increase is either the sale price or the market value at date of ownership change. California excludes the first $1 million plus the principal residence of the parents in parent-child transfers. ‘Claim for Reassessment Exclusion for Transfer between Parent and Child’ form must be filed within three years after the date of the transfer to obtain this exclusion.
Parent-child real property transfers do not incur capital gains tax. But the future sale of the real property will incur capital gains tax. The capital gains tax is on the difference between the parent’spurchase price to acquire the property and the sales price. The parent’s purchase price is adjusted for improvements to the property and depreciation, if any. The purchase price plus improvements less depreciation is the ‘basis’ for a capital gains tax.
A transfer while the parent is living is a gift. In legal jargon an ‘inter vivos gift.’ The purchase price paid by the parent, (the basis) transfers with the property. The child assumes the parent’s basis or purchase price in the property. Any future sale will incur a tax on the difference between the parent’s basis and the sales price.
A transfer or inheritance due to death receives a ‘step-up’ in basis. The parent’s purchase price or basis disappears. The new basis is the market value of the real estate on the date of death of the parent. A sale in the future incurs capital tax on the difference between the market value on date of parent’s death and the sales price.
The last tax on land and real property transfers is the documentary tax. This tax currently is $1.10 per thousand dollars plus any local government additions. The California Revenue and Taxation Code Section 11930 exempts all grants, assigns, transfers or conveys that are gifts or transfers due to death. But the grant deed or quit claim deed must state under penalty of perjury on the face of the deed this exemption to avoid the documentary tax.
Mark W. Bidwell, Attorney at Law and Certified Public Accountant, Inactive, is licensed to practice law in California. His office is located at 18831 Von Karman Avenue, Suite 270, Irvine, California 92612. Phone number is 949-474-0961. Mr. Bidwell markets through websites, http://www.BidwellLaw.com and http://www.DeedandRecord.com.
Deed and Record is an online service to prepare affidavits and quit claim deeds for real property transfers into or out of trusts, remove former spouses and gifting. The online service records deeds it has prepared with the appropriate government agency. For more information call 949-474-0961.