Proposition 13 and Proposition 19 in CA 2021 ~ Q & A

Property Tax Information

Inheriting A Home From A Parent in a Trust or Probate

In June of 2021, we looked into the well known California estate law firm Cunningham Legal, who specializes in Estate Planning, Trust Administration, Asset Protection and Advanced Tax Planning — to see how they interpret and answer questions regarding property tax relief benefits in California in 2021, in a Q & A format. 

As the firm points out, were it not for Proposition 13, and now Proposition 19, in terms of protecting your property from reassessment, all properties in California would be immediately reassessed at full current market value when a change of ownership occurs either by death, gift, or sale.  When a property is “transferred,” or what the California State Board of Equalization calls a “change in ownership.” Which is why the parent-to-child exclusion is so crucial, with respect to protecting your property from reassessment.

Question: How does Proposition 13 affect the amount of property taxes California property owners have to pay every year?

Answer: Proposition 13, an amendment to the California Constitution which passed overwhelmingly in 1978, rolled back residential property taxes on a principal residence to 1975 levels, capping them at 1% of assessed value (plus some local additions by county). Assessments were allowed to rise at a maximum of 2% a year — even though real estate prices in California continued to skyrocket.

Question: How can heirs inheriting property from a parent still claim a limited exclusion from reassessments under Proposition 19?

Answer: If you don’t take pre-emptive action, such as establishing a Family Property LLC, then whether you give your child a home or they inherit it you must apply Proposition 19 rules and regulations to a principal residence, unless it is a farm.

Question: What Prop 19 regulations are now in effect for new homeowners inheriting a home from a parent?

Answer: The child of a parent leaving property must move into a transferred or inherited home (or family farm) as their principal residence within one year. Assuming the child does occupy the home — if the value is less than the factored base year value plus one million dollars (indexed for inflation), the base year value will not change.

Question: Who can take advantage of a limited exclusion from property reassessment under Proposition 19 inherited property transfers, moving a low property tax base over to a new home?

Answer: If you’re over 55, protecting your property from reassessment has actually gotten easier… You can now do this three times during their life instead of just once. Other eligible people include those with severe disabilities as well as victims of natural disasters and wildfires.

Question: What happens with multiple children under Prop 19? Must all the children move into the home as their principal residence?

Answer: This still remains to be seen…The California courts are still determining how a lot of details will be handled under Prop 19.

Question: Do you have to occupy an inherited house forever? How long must you live there as your principal residence before a reassessment is triggered?

Answer: Again, we don’t yet know, and further guidance is needed from the CA Legislature.

Question: Does this mean that all properties, principal residences or otherwise, are subject to possible reassessment when ownership is transferred by inheritance or otherwise, so the math can be done on new property taxes?

Answer: Probably yes. This will greatly increase the workload on assessment offices, and possibly create a significant backlog in cases.

This is why law firms such as Cunningham Legal are not simply waiting for answers from the California Courts and the Legislature. Estate law firms like this are proactively building programs to aid in  protecting your property from reassessment — such as their Family Property LLC to help middle class families save on property taxes. Lawyers like Rachelle Lee-Warner, Esq., Partner at Cunningham Legal, are always closely watching legal and legislative opinions to devise the best possible outcomes for their clients.

According to Cunningham Legal, these days even regular middle class families in California need an attorney to guide them regarding inherited property, to make sure Proposition 19 and Proposition 13 are being taken advantage of correctly; to avoid common errors.  The firm stresses the avoidance of common mistakes with grave consequences…

Question: What are some examples of mistakes people make with Prop 13 when it comes to the title of inherited property?

Answer: If you change the title of a house, you are possibly triggering property tax reassessment.

Question: What is a big mistake people make when they leave property in a Living Trust?

Answer: You name multiple beneficiaries in a Living Trust, which includes your house. Some of the beneficiaries are your children and some are not. As a result, the possibility of your children avoiding a reassessment may be lost.

Question:  Are forms a potential area for mistakes?

Answer: Certainly.  For example, you move your industrial property into an LLC so you can protect yourself while renting it out, accidentally triggering a reassessment because you didn’t file the right form on time.  This is precisely why a good attorney is so important, to protect your properties from reassessment.

Question: What paperwork mistake can parents make with respect to leaving property to their children?

Answer: They do not consider creating a Family Property LLC to protect your properties from reassessment when you die.

Question: What else would be a common paperwork error?

Answer: Your heirs simply don’t know they have to file a claim for reassessment exclusion under Proposition 13 within three years, or they may lose it.

Question: What is another common mistake many beneficiaries  make after inheriting a home from a parent?

Answer: Many beneficiaries do not realize that under Prop 19 they must reside in your primary home to claim an exclusion after your death, never establishing clear residency.

Question: Are there other frequent mistakes people make after inheriting property, with a home transferring from parent to child?

Answer: A transfer occurs without proper registration with the state—and 20 years later, the new owner owes 20 years of “supplemental” back taxes at an enormously higher rate. 

Question: What is a common error often made by parents leaving property to children?

Answer: People think that they are passing on a “principal residence” but they haven’t lived there for years, and the state objects.

Question: What about avoiding fair market rates on the transfer of a residential multi-unit property?

Answer: People think they can pass on the parent-to-child exclusion for a multi-unit property, but they only occupy part of it, and the state objects. There are no simple solutions. That’s why folks involved in any of these issues require legal support.  They need a good lawyer!

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Families and individual property owners can set an appointment for Estate Planning, Trust Administration, Asset Protection, or Advanced Tax Planning by calling their office at 1-866-988-3956. You can also contact Rachelle Lee-Warner, Esq., Partner at Cunningham Legal; Office: (805) 342-0970 Web: http://www.cunninghamlegal.com


 

What Will CA Prop 19 Accomplish for Families Looking For a Low Property Tax Base?

California Prop 19 Info

California Prop 19 Info

The pro-Proposition 19 members of the realtor community in all 58 counties throughout California are openly enthusiastic about Proposition 19, more or less  due to an anticipated increase in property sales, accelerated broker commissions and increased property tax revenue.

Other political, partisan professionals believe in the new tax measure as well, such as Jim Brulte, California Republican Party former chair, who stated, “Proposition 19 protects tax savings and other benefits for vulnerable Californians including seniors, disabled homeowners, and wildfire victims.  State and local Democrats should close unfair loopholes, and provide needed housing!”  Alexandra Rooker, former chair of the California Democratic Party said, “Proposition 19 protects seniors and working families…”

Yet, some others do not see it that way. Why?

Jon Coupal, President of the Howard Jarvis Taxpayers Association wrote in a recent editorial: “Proposition 19 is an attempt by Sacramento politicians to raise property taxes by removing two voter-approved taxpayer protections from the State Constitution. This Prop 19 measure would, all too frequently, require reassessment to market value of property transferred from parents to children, and grandparents to grandchildren.”

Sara Kimberlin and Kayla Kitson at CalBudgetCenter.org, the non partisan California Budget & Policy Center that focuses on public policy news and analysis and the effect of these policies on middle class and working California families – are among the unconvinced.  Ms. Kimberlin and Ms. Kitson tell us emphatically, in direct contrast to the statements from Mr. Brulte and Ms. Rooker: “Proposition 19 does little to help California’s housing affordability crisis! It has created a complicated property tax scheme, and reinforces racial inequities in California.”

As one of the most complicated, confusing measures on the November 2020 state ballot, Proposition 19 did genuinely seem to promise large improvements for seniors, homeowners with “severe disabilities” (which is almost impossible to define), the firefighter’s union, and other related parties. A sure sentimental winner when it comes to pulling the heart-strings of Californians.

Yet the closer you looked (which few bothered to do prior to the vote in November 2020) the more significant the changes to California’s residential property tax system you saw… Some helpful to regular middle class homeowners, folks with disabilities, and seniors… Some not so helpful. In the past, you would want to keep parents property taxes through parent to child transfer. As well as locking in a low property tax base while buying out siblings’ inherited property through Proposition 58 and a trust loan. Now it’s through Proposition 19… and there are limitations. and there are l

If you are inheriting CA property taxes from a parent, hoping to keep your parent’s home, that they left to you, as well as keeping their low Proposition 13 tax base – and your attorney is recommending a 3rd party loan to make all this happen, while buying out co-beneficiaries that are looking to sell off their inherited property shares – it would make a lot of sense to call an established trust lender to get advice and possibly a large irrevocable trust loan.  You want to look into California lenders who will lend directly to an irrevocable trust or probate estate. You also want to make sure you understand all about inheriting CA property taxes from a parent, as well as how to transfer parents property taxes when Inheriting property taxes from a parent.  You want to make sure, regardless, what it takes to keep parents property taxes on any property tax transfer, with a parent to child transfer… and parent to child exclusion from having to pay egregious, current property tax rates! 

In actual fact, it looks like Proposition 19 will most likely expand a property tax loophole for older wealthier homeowners, while covering the cost by narrowing the parent to child exclusion, or exemption, for beneficiaries of inherited properties – but, and here’s  the problem, also requiring state and local governments to create new systems capable of tracking how much new property tax revenue is coming in as a result, with a far more sophisticated, robust administrative infrastructure; significantly increasing overhead costs of existing administrative local governments.

They expect Prop 19 will bring in additional hundreds of millions (economists insist it’s nowhere near the billion-plus the California Legislature is anticipating).  And yet this new admin system will call for a great deal more in administrative costs to manage, hire, create software and train staff for this new tax system than anyone is realistically projecting at this point… as well as re-allocating the supposed additional hundreds of millions due to Proposition 19, as a final step. 

VoterGuide.sos.ca.gov tells us Proposition 19 is likely to result in increased state and local revenues – but not for every county. They tell us while most of the new Proposition 19 property tax revenue willhat-does-ca-proposition-19-accomplish be restricted to a new fund limited to supporting fire response, Prop 19 also limits taxes on seniors, “severely disabled” homeowners, and wild fire of forest fire victims.  Tax analysts and assessors refer to these people as “eligible homeowners.”

An eligible homeowner can move within the same county and keep paying the same amount of property taxes if their new home is not more expensive than their existing home. Also, certain counties allow these rules to apply when an eligible homeowner moves to their county from another county.  So, despite the positive benefits, implementing Prop 198 will not be as simple and as easy as it’s supporters  claim it will be.