Legal Question in Real Estate Law in California

County assessors will have to apply the law literally, as passed, not in a contrary way that might be carrying out what the legislature's language could have been, if they had only stopped to consider your situation. Laws are written and passed to cover the usual situation, and many meritorious special cases are bypassed in the process.

Since they are step-grandparents, you wouldn't qualify anyway. "Step" anything is a descriptive term, not a legal one. A person who is your "step" anything is no more legally related to you than a stranger on the street. As for the reason for the rule, it was the intention of the legislature to give a tax break to direct parent to child transfers. Then someone realized that it would be unfair not to allow that tax break just because of the unfortunate circumstance that a parent outlives their children. So they added an exception to allow the tax break to be used by grandchildren if their parents are dead. If grandparents want to bypass that limitation, they can adopt their grandchildren as their own children.