Gifting real estate in California can be a generous and strategic way to transfer wealth, but it’s crucial to understand the tax consequences before making such a move. Many people assume that transferring property to family members or loved ones is straightforward, but there are significant financial implications that could affect both the giver and the recipient. From federal gift tax rules to capital gains considerations, and the impact of California’s Proposition 19, these factors can greatly influence the outcome of a property transfer.
Without careful planning, gifting property could lead to unintended tax burdens, reducing the financial benefit of the gift. An experienced estate planning attorney can help structure the transfer in a way that minimizes tax exposure and aligns with your long-term goals. Here’s what you should know about how gifting property may impact your taxes, now and in the future.
Breaking Down Gift Tax Rules in California
California does not impose a state-level gift tax, but property transfers are still subject to federal gift tax regulations. Under federal law, gifts exceeding a certain value may be subject to taxation, though exemptions and exclusions often reduce or eliminate the actual tax burden.
Annual Gift Tax Exclusion and Lifetime Exemption
For 2025, the annual gift tax exclusion allows individuals to give up to $19,000 per recipient ($38,000 for married couples) without triggering the need to file a gift tax return. This means you can gift property valued within this threshold to multiple recipients each year without any tax implications.
However, if the gift exceeds the annual exclusion amount, the excess counts against the donor’s lifetime exemption, which is set at $13.99 million per individual for 2025. This means that unless lifetime gifts exceed this exemption, no immediate taxes are due, though a gift tax return (IRS Form 709) must be filed for gifts over the annual exclusion amount.
As a note, the current lifetime exemption rule is set to sunset at the end of 2025. Unless new laws are passed, the exemption is scheduled to drop to pre-2018 levels. At that point, the exclusion amount will return to $5 million per person. However, the IRS has clarified that estates that make large gifts prior to this change will not be penalized, so there is still time to make the most of this opportunity.
Who Pays the Gift Tax?
The donor is generally responsible for paying any gift tax due. However, in rare cases, the recipient may agree to pay the tax, which must be properly documented with the IRS. Because the lifetime exemption is substantial, most people will not owe federal gift taxes, but strategic planning is still essential to minimize future liabilities.
Capital Gains Tax and the Basis of Gifted Property
One of the most overlooked aspects of gifting property is the impact on capital gains tax. When property is gifted, the recipient inherits the donor’s original cost basis, which can result in significant tax consequences upon a future sale.
Carryover Basis vs. Stepped-Up Basis
When property is gifted during the owner’s lifetime, the recipient assumes the donor’s cost basis. For example, if a parent purchased a home for $200,000 and gifts it to their child when it is worth $1 million, the child’s basis remains $200,000. If the child later sells the home for $1.2 million, they will owe capital gains tax on $1 million ($1.2 million sale price minus the $200,000 basis).
By contrast, if the property is transferred through inheritance instead of a gift, the recipient receives a stepped-up basis to the property’s fair market value at the time of the original owner’s death. In the previous example, if the child inherited the home when it was worth $1 million and then sold it for $1.2 million, they would only owe capital gains taxes on the $200,000 appreciation rather than the full $1 million.
This difference makes a strong case for holding onto appreciated property rather than gifting it during your lifetime. Estate planning strategies can help determine the best approach based on your financial situation.
Proposition 19 and Transfers Between Family Members
California voters approved Proposition 19 in 2020, significantly altering how property tax reassessments apply to parent-child and grandparent-grandchild transfers. Before Prop. 19, parents could transfer a primary residence of any value and up to $1 million in other assets to their children without triggering a property tax reassessment. Now, the rules are much more restrictive.
How Proposition 19 Works
Under Prop. 19, for a child to receive a parent’s lower property tax assessment, they must use the home as their primary residence within one year of the transfer. Additionally, if the home’s assessed value is more than $1 million above the current tax-assessed value, the excess is added to the reassessed value, increasing property taxes.
For example, if a parent’s home has a tax-assessed value of $500,000 but a market value of $2 million, the child would only retain the lower tax base up to $1.5 million. The remaining $500,000 would be reassessed, leading to a higher property tax bill.
This change has made it more difficult for families to retain inherited properties while keeping low property tax rates, leading many to explore alternative estate planning strategies.
Estate Planning Strategies to Mitigate Tax Burdens
Given the complex tax implications of gifting real estate, individuals should consider various estate planning tools to minimize financial burdens and ensure a smooth transfer.
Using Trusts to Protect Assets
Establishing an irrevocable trust can be an effective way to transfer property while avoiding certain tax liabilities. By placing property in a trust, owners can dictate how and when beneficiaries receive it, potentially reducing estate and gift tax exposure.
A qualified personal residence trust (QPRT) allows homeowners to transfer their home into a trust while retaining the right to live in it for a specified period. After this period, the property transfers to the designated beneficiaries at a reduced gift tax value.
Considering Life Estates and Retained Life Interests
A life estate arrangement allows a property owner to transfer real estate while retaining the right to live in it until death. This avoids probate and ensures the recipient gets a stepped-up basis, reducing capital gains taxes if they later sell the property.
Charitable Gifting for Tax Benefits
Donors looking for tax advantages may consider gifting property to a charitable remainder trust (CRT) or donating it directly to a nonprofit. These strategies can provide immediate deductions and potential income streams while benefiting charitable causes.
When Gifting Real Estate Makes Sense in an Estate Plan
Gifting real estate can be a strategic way to transfer wealth and achieve estate planning goals, but it isn’t always the best option. While gifting can provide benefits such as reducing estate tax liability and helping family members sooner, it can also trigger consequences that make it less advantageous than transferring property through an inheritance. Understanding when gifting real estate makes sense—and when it doesn’t—can help you make informed decisions.
Weighing the Pros and Cons of Gifting vs. Bequeathing Property
Before gifting real estate, it’s essential to compare it with transferring property through a will or trust. Each approach has benefits and drawbacks. Advantages of making a gift include:
- Allows the donor to see the recipient benefit from the gift
- Can help reduce estate tax liability if the donor’s estate exceeds the federal exemption
- May be useful in Medicaid planning if done well before the lookback period
- Avoids potential disputes over inheritance
Meanwhile, possible disadvantages of gifting property include:
- The recipient inherits the donor’s cost basis (carryover basis), meaning they may owe significant capital gains taxes when they sell the property
- Potential property tax reassessment under Proposition 19 in California, leading to higher taxes for the recipient
- If the donor later needs long-term care, they may no longer have the property as a financial resource
- Cannot be easily undone if circumstances change
By contrast, bequeathing property through a will or trust allows the recipient to receive a stepped-up basis, which resets the property’s cost basis to its fair market value at the time of the owner’s death. This can significantly reduce capital gains taxes when the property is eventually sold. Additionally, properly structured estate plans can help minimize property reassessments and provide smoother transitions for beneficiaries.
Scenarios Where Gifting May Be Beneficial
In some situations, gifting real estate during your lifetime can be a smart move. Some of the most common reasons to consider gifting include:
- Medicaid and Long-Term Care Planning: If an individual anticipates needing Medi-Cal (California’s Medicaid program) to cover long-term care costs, gifting assets in advance can help them qualify by reducing their countable assets. However, Medicaid has a 30-month lookback period in California, meaning that gifts made within 30 months of applying could result in penalties or delays in eligibility.
- Reducing Estate Tax Liability: For individuals with high-net-worth estates exceeding the federal exemption, gifting real estate can help reduce the taxable estate. By transferring property to heirs while still alive, they can lower their estate’s overall value and minimize estate tax exposure.
- Helping Family Members Now: In some cases, parents or grandparents may wish to provide a child or grandchild with a home or property while they are alive rather than waiting until after death. This can be beneficial if the recipient needs housing assistance or if the donor wants to witness the impact of their gift.
- Utilizing the Annual Gift Tax Exclusion: If a property’s value is low enough, it may be possible to transfer ownership incrementally using the annual gift tax. While this is not always practical for high-value properties, fractional gifting may be useful in certain cases.
Scenarios Where Gifting Doesn’t Make Sense
While gifting real estate can be beneficial in some scenarios, there are situations where it’s generally not advisable:
- If the Property Has Significantly Appreciated in Value: If a home was purchased decades ago for a low price but has significantly increased in value, gifting it could saddle the recipient with a high capital gains tax bill when they eventually sell it. Inheritance, with its stepped-up basis, would be a better option.
- If the Donor May Need the Property for Financial or Long-Term Care Planning: Gifting a primary residence or valuable real estate may leave the donor financially vulnerable if their circumstances change, especially if they require long-term care later in life.
- If Proposition 19 Will Trigger a Large Property Tax Increase: In cases where property tax reassessment under Prop. 19 would drastically increase the recipient’s financial burden, keeping the property in an estate plan (or utilizing a trust) may be more beneficial.
- If the Donor May Change Their Mind: Once a property is gifted, the transfer is usually irrevocable. If family dynamics change or financial situations shift, the donor may regret making the gift. Using a trust with flexible provisions can provide a better alternative.
Given the complexities of real estate gifting, professional guidance is essential. Estate planning attorneys can:
- Help determine whether gifting or inheritance is more efficient
- Structure transfers using trusts to avoid unintended tax burdens
- Navigate Proposition 19 rules and explore exemptions for family transfers
- Coordinate gifting strategies with financial planners to ensure liquidity and financial stability for the donor
Without professional guidance, a seemingly simple gift could lead to unexpected tax consequences or complications that reduce the intended benefit.
Skilled Hayward Estate Planning Attorneys for Gifting Property
Gifting real estate in California comes with various tax implications, including federal gift taxes, capital gains taxes, and property tax reassessments under Proposition 19. While gifting can be an effective way to transfer wealth, improper planning can result in unexpected tax burdens.
For many families, alternative estate planning strategies such as trusts, life estates, and charitable giving may provide better outcomes. Working with an experienced estate planning attorney is essential to developing a plan that protects your assets, minimizes taxes, and ensures a smooth transition for future generations.
If you are considering gifting property, the Law Offices of Denise Eaton May, P.C. can help you navigate the complexities of California’s tax and estate planning laws. Contact us today to discuss your options and create a plan tailored to your needs.
