What’s the Difference Between Property Tax Base and Cost Basis?


Your house has a property tax base that is occasionally reassessed and changed by the state or local government, and it also has a cost basis that affects capital gains tax. They both are based on a house, they sound similar, they both involve taxes paid to some part of the government, and they both stem from the value of your home. And yet, they work within separate tax systems and require consideration of different laws.

State governments dictate and assess property taxes, under their individual state laws. The income tax system governs cost basis, capital gains taxes, and changes to property basis (here a step-up).

In a recent article, “Taxes on a home can be confusing: Here’s how to keep them straight,” the San Francisco Chronicle set out to help you keep property tax base and cost basis.

In California, state law allows the transfer of a home from parent to child without a property tax reassessment. Under normal circumstances, the property tax base is based on the assessed value of the property, and the cost basis is based on the cost of the property when purchased. Those numbers are often very close, if not identical, at the outset. Over time, they can diverge if a property is reassessed, usually for a major renovation or addition.

However, under California law, those numbers will immediately part ways when a house moves from a parent to child as part of transfer upon death of the parent. In that situation, the child will receive the house on a stepped-up basis (avoiding substantial capital gain) but keeps the current assessed value (keeping property taxes low). If the house is transferred while the parent is still alive, the cost basis will not be stepped up, but the current assessed value will remain.

Generally, you want a high-cost basis in your home. Capital gains tax is calculated based upon the present value of the asset compared to the cost basis, which is often the price paid at the time of purchase. “Step ups” in basis change the cost basis from the purchase price to a higher value, often current market value. A step up in basis can drastically reduce capital gains taxes.

For property tax base, you generally want a lower number. The property tax base is intended to estimate the value of the home and tax the homeowner accordingly. The lower the property tax base, the lower the property taxes.

The above-mentioned CA law, or similar laws in your state, can save you considerable money if used skillfully. Don’t miss out on possible savings on capital gains taxes for your children, and take care when transferring houses from parent to child during life. You should consider gift taxes and the effect on a cost basis for your child, even if the value of the house is less than the lifetime gift and estate tax exemption. An experienced trust and estate attorney will be more familiar with inheritance laws in their state and can assist you in avoiding tax pitfalls created by transferring houses.

Reference: San Francisco Chronicle (September 1, 2018) “Taxes on a home can be confusing: Here’s how to keep them straight”