The best way to get an answer to this specific question is to contact the tax assessor and ask them. Or go see a local real estate attorney who can review your specific factual situation.
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.
The answer to this question does not establish an attorney-client relationship. Moreover, this attorney is licensed to practiced law ONLY in the State of California. Answers to questions from users in other jurisdictions or states are meant to provide only general information. Users should contact a local attorney in their jurisdiction or state to address their specific tax issue.