Since Proposition 19 was passed and went into affect after Feb. 15, 2021, this affects us owning rental properties who wanted to pass on real estate portfolios to our heirs. Their property taxes would skyrocket, unless it's our primary residence and the kids move into the property.
TLDR: So should investors put our kids (over the age of 18) on title but they would lose the step up basis in value (for capital gains and capital gains tax which is separate from property tax issue) if they are on title and they choose to sell off the properties? Unless Prop. 19 is repealed, then it would be better if my kids sold off the rentals and take the money, so much for passing on real estate for future generations in California.
Possible strategies: I do know an investor who set up a California property in an irrevocable trust prior to Feb. 15, 2021. The first article discusses transferring properties to a family LLC. Before I go pay an estate attorney to restructure everything, thoughts about these strategies?
https://www.kaidenelderlaw.com/blog/2023/march/can-an-llc-he...
https://calawyers.org/real-property-law/prop-19-beware-of-pr...
https://www.cunninghamlegal.com/california-legal-services/ca...
This is my understanding of Prop. 19. Please correct me if this is wrong (I copied and pasted this from someone but I thought this was a good explanation without using a lot of legal language).
- 1) After 2/15/2021 an inherited home that was the parent’s primary residence (assuming transfer from parent to child in this scenario) a reassessment will be triggered UNLESS the child moves into the home and claims it as their primary residence. I have not seen any guidelines about the length of time one would be required to maintain the inherited home as their primary residence to prevent a reassessment. I’ve heard one year but can’t confirm.
- 2) One million dollar exclusion. The PRE- prop 19 law is written such that an inherited house is not reassessed regardless of value. Investment properties like my dad’s rental are (until 2/15/2021) subject to a 1 million dollar exclusion.
Prop 19 obliterates these rules. After 2/15/2021, an inherited home that was the parents’ primary residence will be subject to a one million dollar exclusion ONLY IF the child makes it their primary residence. This means that the first one million dollars of assessed value upon the date of transfer / inheritance is excluded from reassessment.
Example: parent pays taxes based on 275k purchase price. Home’s assessed value at time of inheritance is 1.4M 1.4 - 1,000,000 (exclusion) = 400k
New property tax base = 400k instead of 275k. CONFIRM THIS WITH YOUR ATTORNEY! I found this part to be confusing and might not have it quite right.
3) If the child does not make the inherited property their new primary residence, there is no million dollar exclusion, and in the above scenario (that you and the rest of us are racing to avoid) the child would be paying property taxes based on the 1.4 assessed value.
If you plan to sell an inherited property you’ll want to take advantage of the step up in basis for capital gains tax purposes. If parents gift you property while they are living you LOSE the step up in basis. Selling? Do not transfer property while parents are living.