My mother owns a home in Los Angeles County. She is under the umbrella of Prop 13 where her property taxes are very low. If my mother turns ...

Question

My mother owns a home in Los Angeles County. She is under the umbrella of Prop 13 where her property taxes are very low. If my mother turns over the title of this house to me will I still be under the Prop 13 umbrella or will my property taxes be raised? If so, how can I avoid this in the transfer of the property? Thanks.

Answer

There is a parent-child transfer exception to the Prop. 13 re-assessment rule. However, that is the least of your tax worries. First, there is a good chance your mother would be liable for gift tax on the equity in the house unless you pay her full market value. There are lots of loopholes in the gift tax law, and sometimes there are even temporary periods where the legislation expires. So you might dodge that one. The real killer though is the loss of the stepped up basis. If your mother transfers it to you while she is still alive, you get her capital gains tax basis. If you are asking about the Prop 13, it seems safe to assume that there is significant appreciation in the property since she bought it. If you are given the property while she is alive, whenever you go to sell it you will be subject to capital gains taxes (currently about 25% combined state and federal) on the entire appreciation (over the $250k exemption) since she bought it. If she puts it in an inter vivos trust, gives it to you by will, or otherwise arranges for you not to receive title until she passes, you only pay capital gains on the increase in value between the value when you get it, and when you sell it. So if she bought it for $100k, gives it to you now, and you sell it for $750k in the future, you will pay $100k in taxes (750-100 basis = 650 gain. 650-250 exemption = 400 taxable gain. 400x25%=100). Whereas if you receive it when she passes you get all of the appreciation up until the day she dies, plus another $250 in exempt appreciation, tax free. AND the Prop 13 exemption will still apply. One last thing I should also warn you about. The top two reasons people consider doing a gift transaction like this are to avoid creditors, or to qualify for benefits. Both those kinds of schemes are illegal and can cause a great deal of trouble and expense for both the parent and child, on top of the gift being voided by the courts. Not saying that's your situation, just a warning out there since this question and answer will be available to the public.

Answer

The parent-child transfer exemption was created by Proposition 58, and can be researched under that heading on the Board of Equalization's or the L.A. County Assessor's Web sites. The exemption from reassessment exists, but is not automatic, and you need to follow the assessor's rules in order to get it without a hassle later on.

However, the arguments against transferring appreciated property, or property likely to appreciate between now and the time your mother passes away, are pretty strong. It's worth studying and understanding the example in Mr. McCormick's answer, and doing the necessary family planning to minimize all taxes, not just property taxes. Property inherited by will or trust is also exempt from reassessment and has other tax advantages.