Your assumption that a property's tax base is reassessed at "market" value upon a change of ownership is not entirely correct. The tax base of a property depends upon the sales price which, in the vast majority of cases, fairly approximates market value.
As I understand it, in stating that Peter sells "half the house" to Michael, I take that to mean that Michael is purchasing a 50% tenancy in common interest in the house from Peter. In your hypothetical, since Peter is selling 50% of his interest in the house to Michael, his property tax base should accordingly be reduced by 50%, from $400,000 to $200,000. In turn, Michael's property tax base in his 50% interest in the house should be $500,000, the amount that he paid to purchase an interest in the house.
Disclaimer - I am not an expert in real estate taxation, so you will need to contact a real estate lawyer or the County Assessor to obtain a definitive answer to this question, as one of my colleagues has suggested.