A state law that protects children from steep tax increases on inherited property is likely contributing to the shrinking inventory of homes for sale in many parts of California.

As Baby Boomers — the oldest of whom are 72 — die and leave homes to offspring who convert them to other uses, the shortage could get worse.

Without the law, “I think there would be notably more housing turnover,” said Brian Uhler, a fiscal and policy expert with the Legislative Analyst’s Office.

The tax break, passed in 1986, lets parents transfer a primary residence of any value, plus a generous amount of other property, to their children without it being reassessed at market value for property tax purposes. In California, where long-held homes are typically assessed at a fraction of their current value, this can save children thousands or tens of thousands of dollars per year.

Rather than lose this tax shelter, many children who inherit homes they don’t want to occupy convert them to rentals or vacation homes rather than selling them. Data from Los Angeles County over the past decade support this, according to a report last fall by Uhler.

This may help renters, but makes it harder for buyers to break into the tight housing market. It also “has exacerbated (property tax) inequities among owners of similar properties,” Uhler wrote.

About 60,000 to 80,000 properties in California pass between parents and children each year without being reassessed, Uhler estimated. That’s about 10 percent of all property transfers. In 2015-16, this reduced property tax revenue by about $1.5 billion, 2.5 percent, statewide.

Some, including Uhler, say it’s time to revisit this break. Santa Clara Assessor Larry Stone said he would not vote for the measure if it was on the ballot today. It’s “just a way for people to transfer wealth to another generation,” he said.

The California Association of Realtors is preparing an initiative for the November 2020 ballot that would scale it back, in part to pay for another property tax break the group is pushing for in this year’s election.

The parent-child tax break amended Proposition 13, the landmark law passed by voters in 1978. Under Prop. 13, real property in California is generally reassessed at market value only when it is sold or transferred.

In between changes of ownership, the assessed value can go up by no more than 2 percent a year, plus the value of improvements. Property taxes, including local ones, average about 1.2 percent of assessed value. Normally, when long-held properties change hands, taxes soar. But voters have excluded some transfers from reassessment.

Proposition 58, the law passed in 1986, excluded transfers between spouses. It also excluded transfers — by gift, sale or inheritance — between parents and children of a primary residence and up to $1 million in assessed value for other property. It’s most often claimed by children who inherit property, but the parent doesn’t have to be dead, and it also applies to transfers from children to parents and can be used by an unlimited number of generations.

Escape hatch In 2016-17, about 16,200 Bay Area homes and other properties escaped tax increases thanks to state laws that exclude from reassessment transfers between parents and children (and between grandparents and grandchildren if the parents are deceased). This is how many exclusions each county granted that year: County Exclusions granted Alameda 3,113 Contra Costa 3,393 Marin 726 Napa 415 San Francisco 1,079 San Mateo 1,669 Santa Clara 3,201 Solano 1,028 Sonoma 1,579 Total 16,203 Source: California Board of Equalization

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Proposition 193, passed a decade later, exempts transfers between grandparents and grandchildren, but only if the grandchildren’s parents are dead. These exclusions are pretty rare. For simplicity, we’ll assume children are inheriting property from a parent.

If they are inheriting the parent’s primary residence, there is no dollar limit on the exclusion, and children can rent it out without triggering a reassessment. However, if two children inherit the home and one sells or transfers his or her share — even to the other sibling — that share will be reassessed for tax purposes.

If one child wants the home and the other doesn’t, parents should consider leaving the home to one and other assets to the other, said Terri Lyders, an estate planning specialist with Fidelity Investments in Burlingame.

Each parent can transfer up to $1 million in other property — such as a vacation home, rental unit or strip shopping center — to one or more children combined. The $1 million limit applies to the assessed value, not the market value.

“Say I have a $1 million assessed value on a shopping center I’ve owned for 30 years and now it’s worth $25 million. I can transfer that assessment, plus the low assessment on my house,” to children, the assessor Stone said.

James Zapata applied for and received the exclusion on a Mountain View home he inherited from his father, who died last fall. His grandparents bought the modest, 1,017-square foot home around 1962 and gave it to his father as a wedding present.

His father was a machinist whose business went “belly-up” during the “manufacturing exodus” of the early 1980s, and he never recovered financially or emotionally, Zapata said. A decade ago, Zapata quit his job as a cable lineman to care for his father, who developed multiple sclerosis at a young age, and his mother, who died in 2013.

The home is assessed at about $54,000, and the property tax last year was $948. Homes in his neighborhood are selling for around $2 million — and often being torn down to make way for larger ones. Had Zapata’s home been reassessed at $2 million, his taxes last year would have been close to $24,000.

Zapata said he “never anticipated getting” the tax break, but it has helped him stay in the home he’s lived in since birth. He also got the exclusion on an inherited home in Sunnyvale his family had purchased around 1972. He rents it to his sister at a deep discount.

In 2016-17, county assessors excluded about 62,000 properties from reassessment under Props. 58 and 193.

That is seven times the number they excluded under Propositions 60, 90 and 110. These three measures let homeowners who are 55 and older or permanently disabled sell their primary residence and transfer the tax assessment from that home to another one in the same county or in one of 11 counties that accept incoming transfers. However, the replacement home can’t cost more than the original home, and homeowners can only do this once.

The Realtors association says those restrictions keep empty-nesters in their homes and has placed an initiative on the November ballot that would loosen them.

Proposition 5 would let seniors and disabled homeowners transfer their property tax base to a replacement home of any price, in any California county, any number of times. If they bought a more expensive home, the difference in price between the old and new home would be added to the old home’s assessment. If they bought a less expensive home, their assessment would actually be reduced.

The Legislative Analyst’s Office estimates that if Prop. 5 passes, local governments and public schools would each lose $150 million a year in tax revenue in the early years, growing over time to $1 billion or more per year. Needless to say, governments and schools are against it.

While pushing ahead with Prop. 5, the association is hedging its bets by submitting another initiative to the attorney general for the November 2020 ballot. It would do the same things as Prop. 5, but offset the cost by capping the parent-child exclusion on a primary residence, eliminating it if the child does not live in the house, and abolishing it on other property.

It also would rein in “the shenanigans” big businesses use to avoid reassessment on property transfers, said the association’s lobbyist Alex Creel. He called this provision a “reasonable alternative” to a more sweeping split-roll initiative that would require reassessment of commercial and industrial property, but not homes and small businesses, at least every three years.

Although Zapata benefits from the parent-child tax break, he could see limiting it on high-end homes and eliminating it on other property. “The top 1 percent doesn’t need another break,” he said. “We have all these people who need help; if a little higher property tax would help I’m willing to chip in. What I don’t want my money going to is pension obligations” for government employees.

Contra Costa County Assessor Gus Kramer said he thinks the exclusion “is fine the way it is. People voted on it.” In fact, it got 76 percent of the vote in 1986.

Where it’s most useful is “when someone with special needs had a home modified for them” and is able to keep it, Kramer said. “Or sometimes you have a child who is not as successful as the rest, they’ll never be able to buy a home. You can transfer it to them so they have somewhat affordable housing.”

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender