inherited property tax in california
Dear Len & Rosie,
My rich neighbor told me that her father died last year and that she inherited his multi mullion dollar home, and pays less than $4,000 a year in property tax. She‘s a CPA, so maybe she knows things that I don’t, but how could this be true? That would mean that I pay more in property tax for my two bedroom condo than she does for the six bedroom mansion that she got for free.
Anna
Dear Anna,
It’s likely that your neighbor is telling you the truth. No matter how unfair it seems, these huge discrepancies in property tax exist under California law. Under California’s Proposition 58, parents can pass the family home to their children, and the children can keep the parent’s property tax base. It doesn’t matter whether the home is worth $500,000 or $5,000,000.
If mom and dad purchased a home in 1990 for $200,000, and pay annual property taxes of about $2,500, if that same home is worth $3,000,000 when they die, the children will inherit both the home and the low property tax bill. That’s why your rich neighbor pays less than you for the luxury home she got for free.
And that’s not all. Under Prop 58, parents can also pass $1 million of other real property to the kids with no reassessment - and that one million is not the actual value of the property, it’s $1 million of the “assessed” value of property that shows up on your property tax bill - it’s the Prop 13 value. So if you own a commercial property in San Francisco that is now worth $5,000,000, but the assessed value on your property tax bill is only $400,000, you can pass it on to your children, and they will get your $400,000 property tax base for a multi-million dollar commercial property.
As you can imagine, there are right ways and wrong ways of passing real property to children so that they can take advantage of the Prop 58 exclusion. For example, if you hold your property in a business entity like an LLC, the parent to child exclusion won’t apply. If you want your children to be able to take advantage of the generous Prop 58 laws, be sure to consult an estate planning attorney who has experience in the area.
Len & Rosie