Legal Question in Real Estate Law in California

Regardless of the tax consequences, you are correct that tranferring the property from Aunt to Niece is as easy as preparing a proper Grant Deed from Aunt to Niece, Aunt signing it and having it notarized, and then recording it in the office of the county recorder for the county in which the property is located. However, there will be substantial tax consequences. First, all but the first $13,000.00 of the market value of the property will be subject to gift tax payable by the Aunt. Second, the transfer will trigger a property tax reasessment. So if the Aunt has had the property for a long time and has a low assessed value for tax purposes due to Prop. 13, the property will be subject to a substantial increase in property taxes. Third, whenever Niece goes to sell the property one day, her basis for capital gains tax will be what the Aunt paid for the property, not the market value when the property transfers. The only good tax news is it would be exempt from documentary transfer tax. Contrast this to what happens if Aunt keeps title and just let's Niece occupy and take all contraol of the property, and then leave it to Niece in a will. No gift tax, and there currently is no inheritance tax. In addition, unless the property is extremely valuable, it will probably be under the exemption limit for inheritance taxes. The property will probably still be reasessed for property tax purposes, because only parent-child and certain qualifying grandparent-grandchild gifts and inheritances are exempt, but the reasessment will not come until the Aunt passes away. Lastly, when Niece inherits the property, she will get a "stepped up" basis to the market value at that time. So when she goes to sell it one day, only the increase in value after the Aunt passes away will be taxable.

Exactly true. Sometimes people reason that making a gift like this is a good idea because it avoids probate. I'd prefer to go with tax avoidance than probate avoidance! Further, when property is passed on through a living trust instead of (or coordinated with) an old-fashioned will, the family will probably avoid both the probate process and the various taxes.