Will I have to sell inherited property to pay property taxes | California Proposition 19

Dear Len & Rosie,

My parents have multiple properties that I’m supposed to inherit after they pass. I’ve read that because of the passage of Proposition 19, the property tax bills on each of their properties will skyrocket. I may have to sell properties to come up with the money to pay property tax. Is there any way to avoid this?

Sarah

Dear Sarah,

Proposition 19 limits the parent-to-child transfer reassessment exclusion to just your parents’ residence, and only if you establish your own residence there within one year of its transfer to you. Also, if the market value of your parent’s home is greater than $1,000,000 above the property’s “base value” (that’s the assessed value reported on your parents’ property tax bill) then the amount in excess that will be added to your new assessed value.

For you, the most important date of the new year may be February 15, 2021. Your parents can still transfer property to you under the old Prop 58 rules, as long as the deeds are recorded on or before that date. If your parents own income property whose income they don’t really need, they can give it to you now, saving you thousands of dollars a year in property tax for the rest of your life.

There is a downside. Basis follows Gift. The cost basis of your parents properties (that is, the amount they’ll get tax free if they sell them) be stepped up when they die if they give these properties to you now. You’ll have their old cost basis, and thus more capital gains tax to pay if and when you ever sell these properties.

There’s a way to avoid that too. Your parents can create an irrevocable trust specifically designed to accomplish the following: First, your parents will retain no beneficial interest in the trust. Instead you will be the beneficiary. That means funding the trust, on or before February 15, 2021, will qualify the transfer under the Prop 58 parent-to-child transfer reassessment exclusion.

Second, if the trust includes a provision allowing your parents to change the trust beneficiary to someone other than you, but not themselves, then the trust properties will receive a step-up in cost basis upon your parents’ deaths under Internal Revenue Code section 2036(a)(2). This will give you the best of both worlds - avoiding reassessment while giving you a higher cost basis upon your parents’ deaths.

Don’t forget the February 15, 2021 deadline. To be safe, you’ll want everything to be complete, including the recording of the deeds, by that date.

Len & Rosie

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