California Proposition 19 Tax Impact on Transfer of Property
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California voters approved Proposition 19 in November 2020 that primarily limits people who inherit family properties from keeping the low property tax base unless they use the home as their primary residence. This could have severe financial consequences for children who inherit property from their parents starting on and after February 16, 2021
Under previous California law, a child could inherit a primary residence valued at less than $1 million from their parents without any new assessment regardless if the child used the inherited property as their primary residence or treated it more as a second home or rental property. This allowed children to keep the same property tax basis that their parents had, which for most homeowners in California it is likely that the property is valued significantly higher today than when originally assessed at the time the parents purchased
However, beginning February 16, 2021, children who are going to inherit property from their parents now face a much more difficult decision to keep or sell the residence because of the potential impact of increased property tax assessments
Many children are already living in their own homes with their own families and likely would not move into the inherited property as their primary residence, which means so long as the child wishes to keep the property as a secondary residence or rental property then they will face a huge increase in property taxes based on the new assessment
If the child wants to move into the inherited property and maintain it as their primary residence, then the reassessed value will be excluded from the new property tax basis up to $1 million
There are various strategies Kugelman Law tax and estate planning attorneys could use in an attempt to minimize the tax burden in those situations, but the answers to these questions will dictate the best options available:
- Do you wish to sell the inherited property?
- Do you wish to move into the inherited property and make it your primary residence?
- Do you wish to keep the inherited property as a secondary home or rental property?
- Do you wish to have the inherited property remain in the family in perpetuity?
Parents could gift the property to their children through an estate plan but the carryover basis is the parent’s basis so if the child sells the property then there’s a capital gains tax
A grantor trust allows the parents to remain in the home, places the home in a trust with the child as the beneficiary, and when the parents die the step up in basis happens but the child has the home in the trust and property taxes minimized
California’s Proposition 19 is a new law so there is plenty of ambiguity with no litigation or case precedent so it’s important to thoroughly review your unique situation with Kugelman Law tax and estate planning attorneys to decide which strategy and approach will give you the best chance of a successful outcome to minimize your tax liability.