Avoiding Property Tax Reassessment

[Toby Copeland]

Hello All,

This is my first post and it’s a doozy.   My Father in law purchased his home back in the 80’s.   It’s in California and the tax basis is quite low.   The home is owned in a Trust and his 4 children are the beneficiaries of the trust.   Sadly the home was badly damaged in a fire, fortunately nobody was hurt.   He did get some money from Insurance, but not enough to properly facilitate a quality rebuild.   He wants to give the house to the 4 children and 2 of the children are willing to contribute added capital to improve the house so that Dad can live there for the rest of his life, he is currently 80 years old.   Our idea is to convert part of the home to a Jr Adu and get rental income that will offset the expenses for dear dad and let dad live rent free.   The house is owned outright with no mortgage.  

Our big question Is how do we keep the low property tax basis? We would like to own the property in an LLC so that the 4 kids can have 25% ownership each, and so 2 kids that have funds can loan $ to the LLC to facilitate the rebuild. Can the LLC buy the property for current value to keep the low property tax basis? The current tax basis is $300k annual, and because it is badly fire damaged a fair market value before rebuild is approx $600k. Post build the value should be $1.2m or more.

I know that there is a lot of unpack here, but it seems a shame to have to pay property taxes on the higher value when Dad will still be the main resident for the balance of his life.   Is there another option that the kids should consider?

[Ellis San Jose]

Read up on Prop 19. 

I'm not an attorney or CPA, so consult them before you proceed. You can keep your Dad on title so taxes don't change while he is alive. Reassessment occurs when there is a change of ownership. Consider holding in a trust where you dad is sole beneficiary while he is alive. Upon the death of your father it passes to the 4 children via the trust. 

The 2 beneficiaries can secure & record a lien on the property for their monetary contributions to balance out the percentages of ownership upon inheritance. 

Beneficiaries should get a stepped up basis upon the death of your father if you don't transfer title to bene's before his death.