transferring title from child to parent in California

[rigaton]

What is the name of your state? California.

I live in California. My mom bought a house in 1965 for $20,000. In 1992 she added me as joint owner and the assessment rate, which is quite low because Prop 13 protects us, did not change.

We passed Prop 19 in 2020 which changes the re-assessment law on transfers of property between certain relatives. I have read that Parent - Child transfers are NOT reassessed, if both parties are living in the house.

MY mom and I live in the house and have done so continuously since 1965. Are child to parent transfers subject to reassessment if both parties live in the house or are they included under the Parent - child exclusion?

What I mean is,

1. COULD I quitclaim my share of the house to my mom WITHOUT incurring a re-assessment?

2. What documents would we need besides the quitclaim to be sure that the assessor in Los Angeles does not reassess the property?

3. Do we have to pay the transfer tax fee?

THANKS

 

[Zigner]

What is the name of your state? California.



MY mom and I live in the house and have done so continuously since 1965. Are child to parent transfers subject to reassessment if both parties live in the house or are they included under the Parent - child exclusion?

THANKS

You own the house - why do you believe it would be reassessed?

 

[Ohiogal]

Why do you want to transfer it?

 

[zddoodah]

MY mom and I live in the house and have done so continuously since 1965. Are child to parent transfers subject to reassessment if both parties live in the house or are they included under the Parent - child exclusion?

I'm confused about your question. You say you were added to the title 30 years ago and that there was no re-assessment. What's the issue?

Regardless, no. See Rev. & Tax. Code section 60, et seq.

Do we have to pay the transfer tax fee?

Huh?

 

[quincy]

Does your mom want to transfer her interest in the property to you? If so, she can simply quitclaim her interest. That removes her from the deed.

 

[Taxing Matters]

MY mom and I live in the house and have done so continuously since 1965. Are child to parent transfers subject to reassessment if both parties live in the house or are they included under the Parent - child exclusion?

(Bolding added.) Why do you want to transfer your interest to your mother? That's not something that's generally done for several reasons, including tax issues other than real estate property tax. Since you both apparently live in the home as your primary residence the transfer should qualify for the exemption. Read this article on how Prop 19 works from the San Francisco assessor's office. But even if it does qualify for the property tax exemption, it may cause you federal and state income, gift and estate tax issues. You might want to see a CA tax lawyer before doing this so you can make sure of how this will all play out for you.

 

[quincy]

(Bolding added.) Why do you want to transfer your interest to your mother? That's not something that's generally done for several reasons, including tax issues other than real estate property tax. Since you both apparently live in the home as your primary residence the transfer should qualify for the exemption. Read this article on how Prop 19 works from the San Francisco assessor's office. But even if it does qualify for the property tax exemption, it may cause you federal and state gift and estate tax issues. You might want to see a CA tax lawyer before doing this so you can make sure of how this will all play out for you.

Ahhh. I mixed up who wanted to transfer the interest in the house to whom. Reading comprehension fails on low caffeine.

 

[rigaton]

I should have been more thorough in my post yesterday. SORRY.

I want to transfer my share of the house to my mom because our tax basis is $20,000, which was her purchase price in 1965. I will get 1/2 of a stepped up value when she dies--the house is worth $1,000,000 now, so I would get $500,000--but the other 1/2 would be $10,000. My new tax basis would be $510,000, if the house is worth $1,000,000. Please correct me if I am wrong in my calculations and assumptions.

If I sold the house, I would be allowed $510,000 + $250,000 exclusion, which = $760,000. I would have to pay federal capital gains tax of some % (I have heard 40%) and california capital gains tax on any profit. Again, if I am wrong, then please tell me.

If my mom gets my 1/2 by my deeding it to her, then she could form a living trust with me, her only heir and her only relative, as the beneficiary so that I would take over the house at FULL stepped up value if she predeceases me. She is 90. I would then have a tax basis of say, $1,000,000, if the house were worth that amount, and with my $250,000 exclusion, I could MAKE A PROFIT OF $250,000 free and clear rather than have to pay fed and california capital gains taxes. Am I CORRECT?



I have read several articles about PROP 19 and I never saw anything about CHILD to parent transfers; i saw only parent to child. YOU can see why I came here, namely, to learn if child-parent transfers will trigger a re-assessment. OUR property tax now is $1000 a year, but if the house were re-assessed because of my transfer to her, the new tax would be 1% of fair market value, so perhaps the new property tax bill would be in the neighborhood of $10,000 a year.

Los Angeles county has a 'transfer tax fee.' The authorized transfer tax rate in Los Angeles County is $1.10 for each $1,000 of the consideration or value of the property transferred, exclusive of the value of any lien or encumbrance remaining at the time of sale. LA city also has a transfer tax fee.

I am concerned that

1. the child to parent transfer of our house would trigger a re-assessment of our property tax;

2. my deeding my 1/2 of the house to my mom would constitute a change in ownership and a subsequent TRANSFER TAX FEE from la city and la county, and

3. my mom's creation of a living trust would BE A 2nd change in ownership that caused another transfer tax fee in la city and la county.

IF anybody know the answers, thanks in advance

 

[Taxing Matters]

I want to transfer my share of the house to my mom because our tax basis is $20,000, which was her purchase price in 1965. I will get 1/2 of a stepped up value when she dies--the house is worth $1,000,000 now, so I would get $500,000--but the other 1/2 would be $10,000. My new tax basis would be $510,000, if the house is worth $1,000,000. Please correct me if I am wrong in my calculations and assumptions.

So far, that's correct. But that transfer of $500,000 worth of property to your mother is a gift (if the transaction is respected, more on that later). You'd need to file a federal gift tax return for the year of the gift as a result, which would lower your future gift and estate tax exemptions. And now your mother has an asset worth $1 million in her estate that may be subject to federal and/or CA estate taxes depending on the assets that she has. The federal estate tax in particular is very expensive when it applies.

If I sold the house, I would be allowed $510,000 + $250,000 exclusion, which = $760,000. I would have to pay federal capital gains tax of some % (I have heard 40%) and california capital gains tax on any profit. Again, if I am wrong, then please tell me.

Your maximum federal capital gain tax is generally 20%, not 40%. That is tax only on the tax gain, not the entire sales price.

If my mom gets my 1/2 by my deeding it to her, then she could form a living trust with me, her only heir and her only relative, as the beneficiary so that I would take over the house at FULL stepped up value if she predeceases me. She is 90. I would then have a tax basis of say, $1,000,000, if the house were worth that amount, and with my $250,000 exclusion, I could MAKE A PROFIT OF $250,000 free and clear rather than have to pay fed and california capital gains taxes. Am I CORRECT?

I kind of of figured that this is what you were trying to do. The stepped up basis at death (again assuming your plan is respected by the IRS) would be $1 million. If you later sold it for more than that and qualified for the capital gains exclusion of up $250,000, then your gain of up to $250,000 would not be hit with federal capital gains tax.

Now, here's the problem. Your plan may be undone by the IRS under either the economic substance doctrine or the step transaction doctrine. Your entire series of steps here has only one purpose: to reduce tax. If the IRS discovers that and applies one of those doctrines, you'll end up with the same result on the sale that you would have had if you'd never done it and just inherited your mother's half of the property and then sold the house. And, along with that, the IRS may impose penalties on the tax underpayment, along with interest.

In short, there is a risk of actually ending up worse off by doing this than if you simply left things as they are. As a I said before, there are lot of different tax issues here, and they are interrelated. Given the value of the home and the tax issues involved, I strongly recommend you see a CA tax attorney to help you determine what the best thing to do is and what risks you will have. If you just do this on your own, you may well screw it up and end up paying more than you should. I've seen that happen a lot. So don't be penny-wise and dollar foolish here. The fees you pay for the tax advice will be well worth it by ensuring you get the best tax result legally possible. In this case a tax attorney is the better choice than a CPA or enrolled agent. Much of the law on the economic substance doctrine and step transaction doctrine is the case law (court decisions) and generally lawyers are more experienced with case law and the risks of litigating these kinds of issues in court.

 

[quincy]

Taxing Matters, I don’t know what you did with the quotes in your post to have them show my name - but you were quoting rigaton each time, not me.

 

[Taxing Matters]

Taxing Matters, I don’t know what you did with the quotes in your post to have them show my name - but you were quoting rigaton each time, not me.

Hmm, I don't know how that happened -- I used the same copy for each each of them, or so I thought. I'll fix that now. Thanks for pointing it out.

 

[rigaton]

THANKS, MR. TAXING MATTERS, for such great answers. First, Neither my mom nor I has $12,000,000, so the transfer of the house would not cause Fed estate taxes, and California does not have an estate tax.

2. If my mom formed a living trust with me as beneficiary, would that limit liability to creditors and for lawsuits?

My point is that limiting liability seems to be a valid reason for creating a trust, which means that the 2 IRS doctrines may not apply. Of course, I have no knowlege of the law and await your answer.

THANKS again

 

[doucar]

Generally moving your assets to a grantor trust would not limit your mother's liability, but make it somewhat more difficult for a creditor to collect.

 

[Taxing Matters]

THANKS, MR. TAXING MATTERS, for such great answers. First, Neither my mom nor I has $12,000,000, so the transfer of the house would not cause Fed estate taxes, and California does not have an estate tax.

2. If my mom formed a living trust with me as beneficiary, would that limit liability to creditors and for lawsuits?

No. First, I assume that the trust you would create is a revocable living trust, which is by far the most common type of trust used in estate planning as it affords the most flexibility for the grantor of the trust. Because the trust can be revoked by the grantor it does very little to shield the assets for debts of the grantor. It makes a few more hoops for the creditor to jump through, that's about it. That revocable living trust by itself would not keep the IRS from asserting the doctrines I mentioned before.

Again, I strongly urge you to see a California tax attorney for advice on this.

 

[rigaton]

Thanks. THE revocable living trust does not shield assets from debts of the grantor, but may make collection a little more difficult.

"THE revocable living trust by itself would not keep the IRS from asserting the economic substance AND/OR step transaction doctrines," which certanly gives me pause. IS the assertion of those 2 doctrines 100% likely, that is, it automatically occurs when the IRS sees a quitclaim of a house from 1 joint tenant to another and then a revocable living trust, or is it more of a theoretical possibility?

Thanks. YOUR answers are very thorough and highly appreciated by my mom and me. HAVE a great weekend