The conversation usually starts the same way. We are not selling. The building goes to the kids.
That is a completely reasonable plan, and for forty years it was also a straightforward one. It changed in 2021, and a lot of owners are working from the old rules.
What Proposition 19 did
Before February 16, 2021, a parent could transfer California real property to a child and the child inherited the parent's Proposition 13 assessed value. A building bought in 1985 stayed at its 1985 base, growing 2% a year, indefinitely. That exclusion covered a principal residence plus up to $1 million of assessed value in other property — which for most families meant the rental buildings passed too.
Proposition 19 eliminated that for rental and investment property.
The parent-child exclusion now applies only to two things: a principal residence that becomes the child's own principal residence, and family farms. Even for a qualifying family home, the exclusion is capped at the base year value plus roughly $1,044,586 for transfers between February 16, 2025 and February 15, 2027, with a new figure after that.
An apartment building left to a child is fully reassessed to market value. There is no exclusion, no cap, no election.
What that costs
A fourplex carrying a 1985 base year value of $180,000 pays roughly $2,100 a year in property tax. Reassessed at a current market value of $1,800,000, the bill goes to roughly $21,000 — ten times what the family has been paying.
Run it on a twelve-unit building worth $4 million with a 1988 base of $700,000, and annual property tax moves from about $8,300 to about $47,000. That is roughly $39,000 a year of new expense, permanently.
Now apply the multipliers from our other notes. At a 5.5% cap rate, $39,000 of new annual expense removes roughly $709,000 of value from the building your children just inherited. At 1.25x debt service coverage, it destroys about $418,000 of borrowing capacity, which matters the first time they need to refinance.
For families whose buildings were the plan, this is the single largest change to that plan in a generation.
The thing that moves the other way
At the same time, something valuable happens.
Under Internal Revenue Code section 1014, property acquired from a decedent takes a stepped-up basis equal to fair market value at the date of death. All the appreciation over decades of ownership, and all the depreciation taken against it, vanish for income tax purposes. Heirs can sell the next day and owe essentially nothing on the gain. If they hold, depreciation restarts on a fresh 27.5-year schedule against the new, much larger basis.
California improves on this. As a community property state, when one spouse dies, both halves of community property receive a new basis — not just the decedent's half. In a separate-property state the surviving spouse would carry their original basis on their half.
So at death, two things happen at once and they point in opposite directions:
| What happens | Effect | |
|---|---|---|
| Income tax basis | Steps up to market value | Large benefit |
| Property tax basis | Resets to market value | Large cost |
Owners optimizing for one routinely forget the other. The income tax win is real and often larger in dollar terms. The property tax loss is permanent and shows up every year forever.
Estate tax is probably not your problem
Many owners assume estate tax is the main threat. For most, it is not.
The 2026 federal estate tax exemption is $15,000,000 per person. The 2025 tax act made this permanent and indexed, cancelling the scheduled drop to roughly $7 million that had been set for January 1, 2026. With portability and a timely election, a married couple can shelter roughly $30 million. California has no state estate or inheritance tax.
If your total estate is under those numbers — which describes the great majority of families who own one or two apartment buildings — estate tax is not the issue. Property tax reassessment is. The planning should be aimed there.
The 2026 annual gift tax exclusion is $19,000 per recipient, which is relevant to how interests get moved over time.
The trap in the obvious workaround
The natural instinct is to move the building into an LLC and gift interests to the children gradually. It is a reasonable instinct, and it is where families get hurt.
California Revenue and Taxation Code section 64(d) says that where property was contributed into an entity using the proportional-interest exclusion, the contributors become "original co-owners" — and once those original co-owners cumulatively transfer more than 50% of the entity's interests, the property is reassessed.
That count is cumulative across all years, with no time limit.
Gift 10% a year to use the annual exclusion, and in year six you cross 50% and trigger the exact reassessment the structure was built to avoid. Five years of disciplined planning, undone in the sixth, usually without anyone noticing until the supplemental bill arrives.
There is also section 64(c): if any single person ends up with more than 50% of the entity, everything it owns is reassessed regardless of how they got there.
The questions that come before the structure
Before any of this is worth engineering, the family has to answer things the lawyers cannot answer for them.
Do the children actually want it? An apartment building is a job. One child in Los Angeles who is willing to manage it and two elsewhere who want liquidity is an extremely common set of facts, and it usually means the building has to be sold or refinanced eventually anyway. Structuring heroically to preserve a tax basis for heirs who will sell in eighteen months is wasted effort.
Can it carry itself after reassessment? Run the building's numbers with the new property tax bill in them. If a $39,000 increase turns positive cash flow negative, the plan has a hole in it that no structure fixes.
What happens to the loan? Most commercial loans have due-on-transfer provisions. A transfer at death may or may not trigger them depending on the documents. Worth reading before it matters.
Is there liquidity for the tax and the transition? Reassessment arrives as a bill. So do legal fees, appraisal costs, and often deferred maintenance that got postponed during a long illness.
What we do
We build a straightforward model: the building's income and expenses as they are today, and the same building with reassessed property tax. Then we run it two ways — held by the family, or sold and the proceeds divided.
Very often the useful output is not a recommendation. It is a number the family did not have, which lets them have a conversation they had been avoiding because nobody knew the stakes.
Then, if it makes sense to structure something, you go to your attorney and CPA with a clear picture instead of a vague worry. We work alongside them rather than in place of them.
Nothing here is legal, tax, or financial advice. Proposition 19 and the entity reassessment rules are technical and the mistakes are permanent. Please involve a California property tax attorney and your CPA.
Sources
- California Board of Equalization, Proposition 19
- California Revenue and Taxation Code section 64
- Internal Revenue Code section 1014
- IRS, Estate Tax
- IRS, Revenue Procedure 2025-32, 2026 inflation adjustments