By Lynn K. Ching
In the State of California, real property is reassessed at market value if it is
sold or transferred and property taxes can sometimes increase dramatically as a result.
However, prior to November 2020, children could inherit their parents’
primary residence and a second home (or rental property) without
triggering a reassessment of the property. This was a boon to families.
Parents were able to leave their primary residence (no value limit) and $1
million in any real property to their children, without a property
reassessment. The children were about to take over the inherited property,
without a big increase in property taxes.
No longer. All of that changed when Proposition 19 was narrowly passed
by California voters in November 2020.
Now, children who inherit their parents’ primary residence (after the
effective date of February 16, 2021) may receive a GIANT TAX BILL on
inherited property.
Of course, if the current market value of the inherited property drops below
a parent’s tax base, the children could theoretically end up paying less in
property taxes. However, given the increase in property values in
California, this would probably be the rare exception.
Proposition 19
The good, The bad, and The unknown.
The Good: Proposition 19 allows homeowners who are over 55 years of
age, disabled, or victims of a wildfire or natural disaster to transfer their
assessed value of their primary home to a newly purchased or newly
constructed replacement primary residence up to three times, anywhere in
California.
The Bad
As discussed, children who inherit a family home from their parents will
have to factor in a huge increase in property taxes in the decision to
keep or sell the property. If a child chooses to keep the real property and
use it as his or her 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.)
Example: In this example, a single-family residence has a factored base
year value of $500,000 (parent’s tax base). Parent dies on February 1,
2022 and property is inherited by the parent’s children. The property was
the principal residence of both parent and children. On the parent’s date of
death, the property has a fair market value of $2,300,000.
1) Calculate the sum of factored based year value plus $1,000,000
$500,000 + $1,000,000 = $1,500,000
2) Determine whether the assessed value exceeds the sum of the
factored base year value plus $1,000,000
$2,300,000 is greater than $1,500,000
3) Calculate the difference
$2,300,000 – $1,500,000 = $800,000
4) Add difference to factored base year value
$500,000 + $800,000 = $1,300,000 (Children’s new combined base year
value)
Even with the $1 million exclusion, given that property values well exceed
$1 million in many California locations – a child could still face a dramatic
increase in property taxes on inherited property.
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 owe a lot more than
his/her parents, in property taxes.
The Unknown
Many homeowners are still unaware of Proposition 19 and its
consequences. It will be a few years before the cumulative effect of
Proposition 19 is felt.
Repeal of Proposition 19?
While it is an uphill battle, there is a movement to repeal Proposition 19.
See www.HJTA.org/RepealTheDeathTax
Lynn K. Ching is a partner and one of several attorneys at Diosdi Ching & Liu, LLP, located in San Francisco, California. Lynn may be reached at (415) 318-3990 or by email at lching@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.