by Christine Chacon & Monica Rosas of Best Best & Krieger LLP
Children Inheriting Parents’ Property Will Be Impacted Financially
Newly passed Proposition 19 will have potentially severe financial consequences for children inheriting property from their parents. Approved by California voters in the November election, Prop. 19 marks a landmark change to Prop. 13, the 1978 law that aims to limit property taxes.
Eligible homeowners may now transfer their tax basis anywhere within the State and to a property of greater value, whereas previously homeowners were limited to transfers within certain counties and to homes of the same or lesser market value. Prop. 19 increases the number of times that certain people may transfer their tax assessments. If a person is 55 years or older, has severe disabilities, or lost a home in a natural disaster, the person may transfer their tax assessment up to three times now (up from one). The new law also requires market-value reassessments for inherited properties that are not used as the heir’s
principal residence.
For those property owners age 55 and older, they will be able to blend the taxable value of their old home with the value of a new, more expensive home, which will result in positive property tax savings. For example, if a senior couple sold their home with an assessed value of $250,000 for $2 million and bought a new home for $3 million, the new home’s assessed value would be $1.25 million, which is the $250,000 assessed value, plus the $1 million increase in home value.
But unfortunately, many people will experience a negative impact from Prop. 19, since it considerably limits the availability of the parent-child exclusion for purposes of real estate tax assessments and the resulting property-tax consequences.
Prior to Prop. 19’s passage, parents could transfer a primary residence to children without any new fair-market reassessment, regard less of how the children chose to use the real property. Effectively, this would allow children to avail themselves of the same property tax basis that their parents enjoyed. Additionally, any secondary property, such as a vacation home, rental property or commercial property, could be transferred with up to $1 million of the assessed value being exempt from the increase in property taxes – again, regardless of its use by the children.
Beginning Feb. 16, children who inherit real property from their parents will have to factor in increased property taxes in the decision to keep or sell the property. If a child chooses to keep the real property and use it as the child’s primary residence, then up to $1 million of the reassessed value will be excluded from the new property-tax basis. (Before, primary residences could be transferred with no cap.) If the child chooses to keep the property as a second home, vacation home or rental property (anything other than as the child’s primary residence), there is no $1 million exclusion and the child will face a significant increase in property taxes.
For example, if parents purchased a rental property in 1940 for $50,000, and the value of the rental property is more than $1 million when it is transferred to a child after Feb. 16, the parents’ tax basis does not pass to the child. The child will now have to pay property taxes based on the assessed fair market value, which will significantly affect the child’s decision to keep or sell.
