Family Trust Debt Relief, After Mom and Dad Are Gone
Life in the 2020’s in California, and the United States in general, for middle class and even affluent families, is never all smooth and easy. There are always problems to deal with, legal or economic issues… family relationship disputes, or business conflicts people bring home with them, that often causes rifts between family members…
When a parent leaving property and assets to children passes away, they still, frequently, owe expenses, they often owe money to creditors, if they were elderly prior to passing away parents frequently leave this earth owing medical fees, sometimes legal fees to their family attorney, possibly hospital and lab test expenses, even mortgage payments, and more and more frequently these days – property taxes. There might also be debts owed to other beneficiaries of the trust they are leaving behind for their heirs.
When parents leave a trust behind for their children, who now become beneficiary siblings, there is frequently not enough liquidity in the family trust estate to make pay all these debts. Getting approved for a trust loan by a trust & estate lender like, for example, Commercial Loan Corp in Newport Beach, can produce the required cash to help resolve those kinds of family debts.
Buying Out Co-Beneficiary Siblings In California
As is often the case, parents leave a home to their children, which couldn’t be purchased and duplicated in today’s market for even close to what Mom and Dad pad for it a generation ago, or what Grandma and Grandpa paid for it two generations ago.
Yet there are always more sibling beneficiaries wanting to sell off their inherited property shares after Mom and Dad pass on, than there are beneficiaries or, more likely, one beneficiary who insists on not selling out and keeping Mom and Dad’s home… the family home.
Quite often, needless to say, serious disputes may arise between siblings over a contentious lack of agreement like this, whether to sell or to retain, a family home, where so much is at stake.
Frankly, these family conflicts sometime grow so out of control that family members aren’t even able to agree on the valuated price they believe their family home to be worth! So disputes can grow even more heated and convoluted stemming from an issue like that.
Avoiding Property Tax Reassessment In All 58 CA Counties
This is where an irrevocable trust, working in conjunction with Proposition 19 (formerly Proposition 58) can make it possible for you to take advantage of a parent-to-child exclusion from current property tax reassessment… and thereby actually avoid property reassessment at present day tax rates. Saving your family from a crippling tax hike. Finally, thanks to Proposition 19, property tax exclusions can be utilized in all 58 counties in California.
Even affluent families would feel the bite of a tax hike like this, going back two, even three generations’ worth of reassessment imposed by the County Tax Assessor, and possibly suffer serious financial impact.
A Win-Win Family Property Solution For CA Beneficiaries
All of these financial issues can obviously cause a great deal of strife and stress among family members… However, with a wise attorney around to extend sound advice, a win-win financial solution can be implemented for homeowners… and certainly for beneficiaries inheriting property from parents, who either want to sell off their inherited property shares, or who wish to buyout siblings and minimize property reassessment — keeping a low property tax base when inheriting a home.
Frequently, this shows up in the form of an irrevocable trust, which, working in concert with Proposition 19, will provide a buyout solution where a sibling beneficiary insisting on keeping a family home can buyout siblings looking to sell their inherited property shares, and, at the same time, can certainly minimize property reassessment, through a parent-child exclusion. In fact, these days, most eligible California homeowners are moving quickly on new CA property tax relief opportunities — to avoid triggering property reassessment.
Most Californians can avoid property tax reassessment, if they remain alert, with the right to a property tax transfer, to transfer parents property taxes and keep parents property taxes basically forever, upon inheriting property taxes from Mom or Dad with a parent-child transfer, with the help of an estate & trust lender… and possibly an estate attorney specializing in property tax relief, both who can help a family minimize reassessment rapidly and without any issues, if they correctly use Prop 19 property tax breaks.
Plus, siblings selling out their shares will end up with an extra $14,000 or $15,000 in their pocket, as opposed to doing the sale though a realtors, being impacted by their standard 6% realtor commission… and who knows what other fees and ancillary charges also being imposed on them as well. Peace and quiet will descend on the family… with every sibling getting what the want, in a genuine win-win family transaction… Not lip-service, mind you – but the real thing!
California homes are valued at high prices these days, and frankly most of these properties do seem to retain their high value, in comparison to lower-priced homes in many other states, for example in the Midwest, in the Deep South… way up north in New England, Vermont, Maine and New Hampshire, where families can purchase a multi-bedroom home on an acre or two of land in a decent neighborhood for a very reasonable price, at low 6-figures.
Proposition 13 and the Statewide CA Property Tax Rate Cap
Even so, many California homes now have a “taxable value” that is lower than the average American market value (i.e., in other states). However, these values are deceptive as this is only due to Proposition 13 being voted into law in 1978, holding back the taxable value of property from going up higher than 2% per year, regardless of the increase in the overall average American market value; until, that is, property changes ownership.
Proposition 13 cut the statewide property tax rate to 1% of a home’s taxable value, down from a statewide average of 2.67% to 3%, give or take. Of course, what many Californians don’t realize is that this tax relief for homeowners also holds rental prices down, as apt. building owners, landlords, are spending less on property taxes themselves, therefore are less inclined to go up in rents.
As many of us know, property values were increasing in the early to mid 1970s in California, and business property owners as well as homeowners were suddenly victims of consistent property tax hikes, and artificially escalated property values, when until then you could buy a lovely middle class property at a very affordable rate – almost anywhere in the state, other than certain obvious high-end enclaves, such as Santa Cruz, Santa Barbara, Sausalito, Beverly Hills, Malibu, etc.
Public Push-Back Against Property Tax Hikes
Residents like retirees, middle class widows, veterans and elderly folks with fixed incomes, were basically living on government pensions or social security and perhaps a few stock dividends kicking in here and there. The problem was, from a Californian public relations point of view – folks living on these modest fixed incomes were all of a sudden losing their home to egregious property tax hikes… And public anger was rising to a fever pitch by 1976, 1977.
By 1978 this dissatisfaction among middle class and upper middle class families – against artificially escalated, unpredictable property tax hikes rose to such a fever pitch throughout California that property tax relief, in the form of Proposition 13, was an inevitable outcome. Largely due to the efforts of wealthy apt. building landlord Howard Jarvis and his “Taxpayers’ Revolt” – and this put a stop to homeowners hemorrhaging cash every year on property taxes.
Prior to Proposition13 the state was growing in leaps and bounds, becoming more affluent by the decade; therefore large homes and business properties were being purchased by the middle and upper middle classes – and inherited from parents – which subsequently triggered a “change in ownership” and thus property reassessment.
Therefore the resulting property taxes were high enough to be called estate taxes, and often caused middle class families to sell their home, as they simply could not afford this type of property taxation any longer. Put quite simply – it was unsustainable. Which is precisely why Howard Jarvis and Proposition 13, and later the ability to transfer CA property between siblings, came about in the first place.
Proposition 58 and the CA Parent-Child Exclusion are Born
By the 1890s property owners in the state were getting used to property tax relief, and wanted more. So in 1986 the California Legislature voted with a huge majority to place a measure on the ballot called Proposition 58, to exclude parent-child transfers of property from the legal definition of “change of ownership.” And the right to transfer CA property between siblings, along with parent-to-child exclusion, was born… adding to the popular suite of tax relief benefits furnished by Prop13.
This tax measure (which has completely morphed into Proposition 19, with additional tax breaks), used in conjunction with a loan to an irrevocable trust, made the right to transfer CA property between siblings, also called “a sibling-to-sibling property transfer”, possible – so beneficiaries looking to buyout inherited property shares from co-beneficiaries could easily do so, while establishing a low property tax base, when inheriting a home from parents… when inheriting property taxes.
Heirs were now able to transfer parents property taxes, to transfer CA property between siblings (through a trust loan) and keep parents property taxes from a now standard property tax transfer – which attorneys call a Parent to Child Property Tax Transfer… plus for the first time the right to avoid property tax reassessment during an inheritance – and this was actually normalized. Which was incredibly important to middle class homeowners all across the state of California, who were previously struggling to make it every year, with heightened property taxes always looming over their heads. This was causing a growing state of anxiety, county by county.
This also meant that when homes and small business properties were inherited the property tax bill would not be affected. Proposition 58 was approved by more than 75% of voters statewide. In fact voters soon thereafter passed Proposition 193 to extend the same rules to transfers between grandparents and grandchildren, as long as the children’s parents were deceased.
Of course, as with everything else, certain malcontents (the realtor community among them), simply couldn’t stand to see that many people benefiting from a good thing, and so decided to unravel it, get more property tax revenue into the state coffers, as well as increase real estate sales commissions!
California Realtors Finally Deal a Blow to Property Tax Relief
In 2020, backed largely by the powerful California realtor community, with the CA Legislature stepping in to provide political cover, “Proposition 19” was created to take a large slice of that tax relief back from homeowners – yet appealed strongly to homeowners over 55, the elderly, folks with infirmities, and victims of natural disasters, fires and earthquakes, all who benefited nicely from a host of attractive property tax relief benefits!
Although, many voters (now experiencing buyer’s remorse) did not fully realize that Proposition 19 took away some of the protections afforded by Propositions 58 and Prop 193, and replaced them with a more limited exclusion from property tax reassessment. Many middle class and upper middle class Californians who have worked all their lives to own a home to pass down to their children are finding that their plans have been upended by Proposition 19. Due to the increase in property values, reassessment of inherited properties to current market value will force some homeowners to sell because they can’t afford to pay the higher tax bill every year.
Which is exactly why the spirit of Howard Jarvis reared up its’ head again, in the form of the Howard Jarvis Taxpayers Association organizing volunteers to collect signatures to try to repeal the “death tax” portion of Proposition 19, without changing the provisions that protect seniors and wildfire victims. To qualify the measure for the November 2022 ballot, nearly a million valid signatures of registered voters are needed. Deadline to submit signatures is 4/29/22.
Once again the middle and upper middle classes, along with the elderly, have powerful allies in California!
Taxpayer’s Association Summation of Efforts to Protect Tax Relief:
“Early organizing will be essential if the effort to repeal the death tax is to succeed. The Howard Jarvis Taxpayers Association (HJTA) is shifting into high gear, with all hands on deck, signing up volunteers and spreading the word at https://reinstate58.hjta.org/#volunteer The Taxpayers Association is sponsoring a Bill entitled “Senate Bill 668”, introduced by Sen. Patricia Bates (of Laguna Niguel) – which would, if passed, continue to protect your grown children, and theirs, against tax hikes should they inherit your home, which attorneys have a fancy name for – i.e., “intergenerational transfers of property” (up to Feb 16, 2023).
Proposition 19’s changes to the tax treatment of inherited property took effect in February, leaving Californians little time to consult with family members, attorneys or tax professionals to plan for these sudden, harsh changes to property tax liability for the next generation.
HJTA also supports a constitutional amendment to reinstate Proposition 58 (1986) and Proposition 193 (1996), two measures that were overwhelmingly approved by voters to protect family property from reassessment when passed from parents to children or grandparents to grandchildren. Assemblyman Kevin Kiley (Granite Bay) is working with HJTA on final language for an Assembly Constitutional Amendment that would restore these protections.
California voters have strongly opposed state inheritance taxes, which were abolished by constitutional amendment in 1982. Proposition 19 has effectively resurrected the inheritance tax in California, with the added burden that families must pay it every year as a condition of keeping their property.”
And once again the middle and the upper middle classes plus the elderly in California have powerful friends and allies stepping up into the spotlight to protect their homes, their security and their well being!
Establishing a Low Property Tax Base ~ Who to Turn to in 2022
It’s always interesting, with respect to estate funding and inheritance financing, how different schools of thought come up with different solutions for saving money on property taxes, for out-of-the-box funding solutions against inheritance assets, and for mortgage capitalization.
Name brand name lenders, setting the tone for most lenders in California, such as Quicken Loans, e-Loan, Wells Fargo and Bank of America – are admittedly all high-end, reliable finance-information and lending sources. Yet – when it comes to important income tax or property tax matters, or inheritance funding solutions – their editors and writers, talented as they may be, still only nibble around the edges on anything but the most conventional, largely ineffective solutions.
For example, where tax relief is concerned these firms typically dance around the critical issues associated with property tax exemptions, establishing a low property tax base, or avoiding property tax reassessment – when inheriting a home in any of the 58 counties in California. So who do we turn to for help?
Many property owners embrace basics, and enlist assistance from established property tax experts such as Rachelle Lee-Warner, Esq. — well known Partner, Managing Attorney & Trust Administration / property tax relief expert at Cunningham Legal. Or a reliable trust lender like Commercial Loan Corp, led by inspirational CEO, Kerry Smith in Newport Beach – specializing in irrevocable trust loans, avoiding property tax reassessment and establishing a low property tax base – for middle class California families… guiding them through while showing them all the new advantages that Proposition 19 offers. Perhaps not as generous as Proposition 58 might have offered… however, lowering property taxes to a greater degree than you might think.
Avoiding Poor Solutions and Time-Wasters
With regards to lowering property taxes — these are typical solutions from “expert websites” that homeowners might not want to take very seriously, or avoid completely…
Limiting your “home improvement” projects;
Researching nearby neighborhoods for pricing and home values;
Asking uninformed young attorneys or relatives (to save money) if you qualify for tax exemptions;
Walking around your neighborhood with your Tax Assessor;
Checking your tax bill for inaccuracies;
Getting a second, third and fourth opinion from unproven Assessors and property tax consultants;
Meeting with your local Tax Assessor to convince him/her to revise your tax bill;
Researching and filing a property tax appeal challenge with your County Tax Assessor without a professional property tax appeal firm – on your own, simply to save money.
Checking for inaccuracies, or getting a second opinion isn’t a bad suggestion. But walking through your house with your local Tax Assessor? Researching prices around your neighborhood? With all due respect to the financial websites that hand out this kind of advice, these suggestions would be laughable – if they weren’t so serious. Limiting your home improvement projects – to lower your property taxes?
Effective Solutions with a Tax Professional or a Trust Lender
We will never be free from property taxes while we own our own home, but one does need to be on the there are a few simple “tricks” you can use to lower your property tax bill, as certain websites claim.
We can investigate comparable homes in our neighborhood for “discrepancies”. Never making any changes to our property exterior right before a tax assessment, as this can increase the value of our property; hence increase our property tax bill.
Or, we can stroll around our house and chat with our Tax Assessor during our yearly assessment. That makes a lot of sense. Lastly, we can look for local and state exemptions, and, “if all else fails, write up and file a tax appeal to lower our property tax bill” so suggests a well known financial site. Listen, if we’re going to file a property tax appeal with a County Tax Assessor, we’d be a lot better off doing it through a professional property tax appeal firm.
If we want to address this issue seriously, and not simple throw silly and unrealistic suggestions out there simply to see what sticks – we have to look at realistic opportunities to take advantage of.
For example, if we’re an heir of an estate, or a trust beneficiary inheriting a house from our Mom or Dad – and the house is in an irrevocable trust – a loan to an irrevocable trust from a trust lender is likely required if the trust does not contain sufficient cash to make an equal distribution to all of the co- beneficiaries looking to sell off their inherited property shares. This is frequently taken advantage of by beneficiaries, perhaps like yourself, who intend to keep a home inherited from a parent at the original low property tax base.
A loan to an irrevocable trust makes it possible to buyout inherited property shares from co-beneficiaries and greatly speeds up the trust distribution process. A trust loan also saves a great deal of money when you compare selling the family home through a realtor or broker receiving a 6% commission, plus legal fees, and other closing costs.
Inheriting Parents’ Home While Keeping Their Low Property Tax Base
Bottom line, avoiding property tax reassessment and establishing a low property tax base by transferring property taxes, are property tax relief benefits available to all property owners in California, protected by Proposition 19 & Proposition 13. This should always be taken full advantage of. You can transfer parents property taxes when inheriting property and inheriting property taxes – and keep parents property taxes basically forever, establishing a low property tax base with Prop 19 benefits as well as taking advantage of a trust loan buyout of property inherited by siblings. Why not? It’s your right. Plus, there is no better time than the present to become better acquainted with the parent to child property tax transfer.
This type of property tax transfer is at the foundation of property tax relief for all Californians, generally through a parent to child property tax transfer on an inherited home – usually referred to as a Prop 19 parent-child transfer or parent-to-child exclusion… all the way to a transfer of property between siblings through a loan to an irrevocable trust, in conjunction with Proposition 19 – with an entire year to settle in to an inherited principle residence, or multiple residence (although only one heir is actually required to lock this tax relief benefit in). As long as the parent leaving that property to heirs resided there as a principle residence as well – which is usually the case anyway.
Using a Trust Loan to Establish a Low Property Tax Base
Buying out sibling property shares while keeping your inherited home at a low Proposition 13 tax base is a popular avenue for many families. Not only that, if your siblings are receiving funds from an irrevocable trust to sell their inherited property shares, they would receive far less money getting cash from an outside buyer, as opposed to funds from an irrevocable trust. The costs associated with preparing a home for sale, expensive realtor fees, and potential closing costs associated with selling an inherited home can be incredibly expensive.
When a trust loan is used to facilitate a trust distribution, each beneficiary receives an average of an additional $15,000.00 in distribution when compared to selling the home. The person keeping the family home also benefits – saving $6,200+ per year in property tax savings – simply by avoiding property tax reassessment on a nice old inherited home from Mom and/or Dad.
Voters passed CA Proposition 19, just squeaking by with a handful of votes from confused voters in Nov of 2020, and the tax measure became active on April 1, 2021. If you want to intake good advice and avoid mistakes, have property tax experts carefully walk you through Proposition 19, and Proposition 13.
Most middle class and upper middle class California homeowners probably have heard about Proposition 19, the new property tax law that allows seniors and disabled homeowners to keep their current property tax rate when they sell their home and buy a new one. But they may not know how to apply this new law when moving to a new home.
It’s the state’s largest expansion of property tax benefits in decades, basically allowing qualified homeowners to take their Proposition 13 tax base with them anywhere in the state, no matter the price of their new home.
Helping California Middle Class Homeowners Avoid Property Tax Reassessment
Under Prop. 13, tax hikes are capped at 2% a year, meaning the longer you own your home, the lower your property taxes relative to the market value of your home. But some homeowners lose their Proposition 13 tax break when they sell their old home and see their new tax jump to the full market value of their new one.
If you are 55 years or older, a person with a severe disability or a victim of wildfires or natural disasters, you can move to any home in the state, regardless of the home’s price. Your tax is unchanged up to the value of your old home. If your new home costs more than your old one, you pay an additional amount based on the market value over your old home’s price.
When you’re used to a low property tax bill, it can be a shock to your monthly expenses when buying a replacement home includes a huge property tax increase – especially if you have lived in your current home for many years.
Some older middle class homeowners feel trapped because they can’t leave their current home, even if it no longer fits their needs, because they are on a fixed income like Social Security, or a modest pension or military retirement, and can’t afford to move. Taking advantage of Proposition 19 may appear challenging. But as time passes, more and more tax assessors are providing online links to forms and resources to help homeowners understand how to benefit from these new property tax rules and regulations.
We have discussed this issue previously in this blog… however, it does bear further introspection. Property taxes that have been deferred for a few months can hardly be called property tax relief! Regardless how many people in state leaders hip positions call it “property tax relief”, it simply is not. It’s merely tax deferment. A parent-child exclusion avoiding property reassessment is a genuine property tax relief benefit. The press should not conflate the two in headlines as if they were the same. They’re not.
Genuine Property Tax Relief VS Postponed Property Taxes
The State Controller’s property tax postponement program permits senior property owners and homeowners with a severe disability to defer property taxes on a primary residence – if they are in compliance with the new Prop 19 requirements plus have 40% or more equity in their house; with a household income of $45,810 or less per year. With a lien against the house, until taxes are paid off.
You get to delay paying the tax man for ninety days. So Californians need to determine what this actually accomplishes. Does this help homeowners financially? Now, deferring taxes for five-years might be helpful to some property owners. But a few months is simply not going to move the needle into the “help” column.
Other than being a rather weak gesture, this is a dismal effort to help residents in California get through an unprecedented, tough time. If the folks running the state wanted to really help Californians, they might want to consider simply deleting property taxes this year, and see how the virus crisis is next year.
Not only would this be a great political move – it would actually help homeowners in a big way. It would be a genuine property tax relief initiative. Postponing property tax payments is merely deferring taxes that have to be repaid anyway, therefore there is no authentic relief of taxation involved here, merely a delay.
Property Tax Exemptions for Disabled Veterans
If a military veteran is 100% disabled as a result of a combat wound or whatever, that veteran can get approved for a full property tax exemption. Other homestead exemptions exist for veterans over the age of 65, along with surviving spouses.
Eligibility
To be eligible, a homeowner has to apply and subsequently meet all of the criteria below for every year in which a postponement of property taxes is being requested:
• Residents must be age 62 or older; or severely disabled (including blindness); • Residents must own and reside in a primary home (exception being house-boats); • Residents must verify a household income of $45,810 or under; • Residents must own 40% or more of the property; • There can be no reverse mortgage on the property in question.
Property Taxes that are in Default, or are Unmanageable
CA state law does not allow the SCO (State Controller’s Office) to pay for delinquent or defaulted property taxes that are owed on a home, for example, that is under consideration for postponement of property taxation. Late These taxes simply have to be paid, by California law. Regardless of a Pandemic, or whatever.
However, you can qualify for postponement of current taxes. The amount of defaulted property taxes will be added to the amounts owed against the property to determine equity. Therefore “delinquent” or “defaulted” property tax payments do not qualify for tax deferment. Another reason this mild gesture does not contain any of the earmarks of genuine tax relief…. such as those provided for by tax breaks like a parent-child exclusion avoiding property reassessment.
Interest Rates on Deferred CA Property Tax Payments Owed
The interest rate imposed on “postponed” taxes under this PTP (Property Tax Postponement) program is 5% yearly. Interest on postponed property taxes is computed monthly on a simple interest basis. Interest on the postponement account continues to accrue until all postponed property taxes plus interest are repaid to the state. So $1,000 in deferred taxes would be $50 yearly – $4.17 monthly.
Property tax relief? It looks more like loan sharking than it does tax relief.
A Lien or Security Agreement for Postponed Property Taxes
To secure repayment of deferred property taxes, the State Controller’s Office (SCO) imposes a lien against property with the county or a security agreement with the Department of Housing and Community Development. The lien or security agreement remains in effect until the account is paid off. A one-time fee is added to release a lien once the account has been completely paid off.
Property Taxes Paid By California Lenders
The State Controller’s Office (SCO) is not responsible for contacting your lender if your property taxes are currently paid through an impound, escrow, or other type of account. If you’re approved for Property Tax Postponement (PTP), the SCO will typically agree to make a payment on your behalf directly to the County Tax Collector. PTP does not reduce your monthly mortgage payment. A business property owner or homeowner must contact their lender directly to pay off monies due.
Refund of Paid Property Taxes
Once an application is approved and property taxes have been paid for a current-year, or if the property taxes are paid by a lender, a property owner receives a refund from their county tax collector. All full or partial payments are applied to accumulated interest and to the balance owed. Checks or money orders are payable to the “California State Controller’s Office” and mailed to:
California State Controller’s Office Departmental Accounting Office – PTP P.O. Box 942850 Sacramento, CA 94250-0001
Collection and repayment process
Homeowners can pay all or a portion of the balance to the State Controller’s Office at any time. However, postponed property taxes and interest are due right away or payable when a homeowner:
a) Moves away from a property; b) Sells or conveys title to the property; c) Is deceased but does not have a spouse, registered domestic partner, or other qualified individual who continues to reside in the property; d) Is delinquent on future property taxes or has other senior liens; e) Refinances or gets a reverse mortgage on the property in question.
Authentic Property Tax Relief
As you may or may not know – genuine property tax relief does exist in California, in terms of establishing a low property tax base when inheriting a home; through a process discussed in this blog several times, combining a parent-to-child exclusion avoiding property reassessment protected by Proposition 19 in concert with a 5 or 6 figure loan to an irrevocable trust from a trust lender.
The process of buying out siblings’ shares of inherited property through an irrevocable trust loan – the transfer of property between siblings or “sibling to sibling property transfer” – equalizes payment among beneficiaries selling their inherited property shares, and furnishes them with far more cash than a conventional outside buyer would.
Likewise, genuine property tax relief such as keeping a low property tax base when inheriting a home; or property tax transfers in California for those inheriting real estate from parents… giving homeowners the ability to transfer parents property taxes under Proposition 19 in tandem with a locked-in parent-child transfer or a parent-to-child exclusion avoiding property reassessment at high current tax rates when inheriting property taxes, and transferring property taxes in California.
Although, manufactured home owners with delinquent and/or defaulted property taxes do not qualify for property tax postponement. However, as we have already indicated, it’s high time to cease discussions altogether about property tax postponement – and start pivoting rapidly towards property tax cancellation, while the pandemic continues to cause shutdowns and job losses and economic hardships for middle class homeowners.
California Property Tax New and Information on Transferring Property Taxes
Prop 19 Parent-Child Exclusion From Property Tax Reassessment
We’re going to take a look at 2021 property tax issues from a high-level overview perspective here – simply to provide a firmer grasp on everything involved going forward, now that changes to California property tax relief are active.
Proposition 13 property tax relief was voted into California law on the June 1978 ballot, with 64.79% of the vote, insuring that, going forward, the taxable value of California properties would be based on their assessed value (i.e., “base year value”) rather than their current, or “fair market”, value. Proposition 58 followed in 1986, with its’ wildly popular “parent-child exclusion”… trust loans to allow beneficiaries inheriting property to begin keeping a low property tax base when inheriting a home is another outgrowth of the popular statewide California parent-child transfer tax break exclusion from property tax reassessment. If you need assistance with a trust loan or learning more about a parent to child property tax transfer, you can call 877-756-4454 or complete this form for additional information:
Despite the fact that the new Proposition 19 property tax law has for all intensive purposes replaced Proposition 58, Proposition 13 will remain intact, as is, going forward. Proposition 58, was passed on the Nov 1986 ballot, with 75.7% of the vote in California created an exclusion from property tax reassessment, or property transfers between parents and children, known as the parent-to-child exclusion.
Property tax transfer benefits to transfer parents’ property taxes, inheriting property taxes, are still intact under Proposition 19. The parent-child transfer tax break still allows new property owners, i.e., beneficiaries inheriting parental property, to keep parents property taxes – thereby avoiding property tax reassessment and maintaining exclusion from property tax reassessment. These tax breaks under Proposition 19 are most helpful to Californians with real estate that has low assessed values due to still robust Proposition 13 property tax relief.
As most of us know, assessed value usually reflects the purchase price plus added cost of alterations and improvements; plus an increase of 2% per year maximum tax rate – except when there is a change in property ownership.
Because real property in California tends to appreciate at a higher rate than 2% per year, the longer real estate is held onto the greater the difference between its’ assessed value and its’ fair market value, hence the greater the difference between property taxes a homeowner pays versus what is paid by the owner of a property just purchased, both properties being of similar value.
Proposition 19 allows a beneficiary inheriting parental primary property to move into an inherited primary residence right away, inside 12-months, avoiding property tax reassessment… As long as the fair market (i.e., current) value of the new inherited home doesn’t exceed the parent’s assessed value by more than $1,000,000
Qualified Personal Residence Trusts & Irrevocable Trust Loans
With respect to irrevocable trusts, if you happen to have siblings and are of the mindset to buyout your sibling co-beneficiaries that are intent on selling off their inherited property shares to an outside buyer – plus you want to keep your parent’s low property tax base, a trust loan solution is surely worth exploring.
Moreover, as you are inheriting property taxes on an inherited home left by your parent, an irrevocable trust loan from a reliable trust lender, working in conjunction with Proposition 19, is certain to provide those co-beneficiaries of yours with far more cash than any outside buyer would offer… So all around, this trust loan process is surely worth serious consideration and an in-depth discussion with your trust or estate attorney.
Transferring Your Assessed Value to a New Primary Residence if You’re 55+, Disabled, or a Victim of a Natural Disaster or Wildfire
If you are over age 55 you now have access to special property tax relief privileges, which is ironic as social bias concerning older Americans usually places seniors in a somewhat inferior, less privileged position; yet in this case seniors are given greater tax privileges than younger residents, which is a rather extraordinary turnaround from the usual “ageist” social and work-place dynamic.
Or, if you are what tax assessors refer to as “severely” disabled; or if you are a victim of a governor-validated “natural disaster”; or an out-of-control wildfire, such as California has been experiencing on and off for some time – you can transfer the assessed value of your primary residence in California to a home you recently purchased, or that was constructed recently as a “replacement residence” in any one of the 58 counties in the great state of California.
Let’s step back for a moment, and take a realistic look at this process from a high-level viewpoint…
These days, the transfer of your property’s assessed value to a primary replacement residence can take place up to 2-years after the completed sale of your original primary residence; and will remain effective even if your replacement primary residence has a higher current, or fair market, value than your original primary residence.
However, if that is indeed the case, the excess fair market value of your new house will be added to the assessed value of your original house, which will result in the new assessed value of your new primary residence. Not only that, speaking of special privileges for those over 55… if you are a homeowner over 55, you can take full advantage of the assessed value transfer up to three (3) times during your lifetime.
Additionally, a “primary residence” under Proposition 19 also applies to family farms. Lastly, in certain situations, when a grandchild’s parents are both deceased, assessed value can also be legally and validly transferred from grandparent to grandchild, through Proposition 193.
The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act (AKA: Prop 19)
For homeowners in California , it’s important to have a good general understanding of how property tax relief is changing. Fortunately, Californians finally do have a clearer understanding of what property tax measure Proposition 19, passed into law on Nov 3, 2020 by voters in the state of California, is really all about, as well as how Proposition 58 has changed, in terms of property tax reassessment.
A lot of property owners in California aren’t aware of the fact that Proposition 19 was also entitled, “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act” – A peculiar, overly wordy title; indicating that seniors, severely disabled people and victims of wildfires or natural disasters will be able to transfer the taxable value of their “original residence” to a “replacement residence” up to three times during their lifetime – anywhere throughout all 58 counties within the state of California.
California State Board of Equalization Chairman Antonio Vazquez said, in regards to the new tax measure, Proposition 19: “Seniors, the severely disabled, and victims of wildfires or natural disasters can now move to a replacement home anywhere in California and avoid significant property tax increases if eligible. Property tax relief can be beneficial for those especially on limited incomes or who have been affected by wildfires or natural disasters.”
What is the California State Board of Equalization (BOE)?
For all of us who have heard all about BOE for many years, yet have not really understood what the California State Board of Equalization was really all about – it would be a good idea to sit down for a moment and look more closely at the BOE, and see what it is that they do, and how they break down the new Proposition 19 tax measure.
For starters, the CA State Board of Equalization is literally the only elected tax board in the United States. It contains four Equalization District Members, positioned by locale, plus the State Controller. BOE’s legal responsibilities encompass the management of 58 County Assessors to make sure assessment best practices are in order statewide, without deviating from the set rules and regulations.
Believe it or not, the State Board of Equalization also assesses the property of public utilities along with regulated railroads, and takes in revenue from private railroad car tax. BOE also manages “Alcoholic Beverage Tax” and “Tax on Insurers”; plus property tax administration, promoting “fair and equitable assessments” – protecting tax revenue that school systems, local communities, and the California Legislature depend on, year after year.
Dispelling Confusion Around Proposition 19
The BOE also clarifies some of the confusion surrounding Proposition 19 and its’ ability to help residents avoid property reassessment, in contrast to Proposition 58; confirming that middle class seniors, age 55 and older… often living on a modest fixed income; or those severely disabled, must meet specific requirements to qualify for new property tax breaks.
Both an “original” and “replacement residence” has to meet special requirements in order to be eligible for the homeowners’ or disabled veterans’ exemption. An application has to be completed and filed with the County Assessor to enable transfer of any taxable value. Finally, a “replacement residence” must be purchased or newly constructed within two years of the sale of an original home. If the market value of a “replacement residence” is greater than the market value of the “original residence”, the difference will be added to the taxable value when transferred.
As far as victims of a wildfire or natural disaster are concerned, similar requirements apply but there are no age restrictions. In order to qualify, a residence has to be seriously damage by a wildfire or a legally verified (frequently “governor verified”) natural disaster.
Parent-Child Exclusion, Originally Under CA Proposition 58
It is true that CA Proposition 19 limits property tax relief under CA Proposition 58, most notably the parent-child exclusion. This eliminates the $1,000,000 assessed value reassessment exclusion as in a parent-child transfer of residential property that is not a primary residence. This obviously limits the parent-child transfer exclusion from property tax reassessment to primary residences only.
Yet as long as that criteria is met, Californians can avoid property reassessment, keeping a low property tax base when inheriting a home; as long as the parent leaving the property resided there as a principle residence as well, plus beneficiaries inheriting the property make sure they move in within that 12-month deadline, the California parent to child exclusion from property tax reassessment is protected by Proposition 19, formerly by Prop 58. As long as this type of property tax transfer, Prop 19 property tax break, is used properly, and the move into an inherited home occurs within one year of inheriting property taxes from a parent. To reiterate, taken over by the beneficiary, or heirs, as a primary residence; in order to avoid property reassessment. And according to the new tax laws, as of Feb 2021, this is the only method left to residents, after Proposition 19 limits are imposed, to be able to successfully transfer parents property taxes – and keep parents property taxes, basically forever.
Transfer of Assessed Value to a New Residence
To review, the other major changes to property tax relief for California property owners, as we touched on a moment ago, is relief for homeowners age 55 and older, folks with a disability, or victims of a wildfire or natural disaster. These residents are now able to transfer assessed value of their primary residence in any county in California – to a home they have just bought, or a newly constructed “replacement residence” used as a primary home.
These new Proposition 19 measures apply to real estate anywhere in California, if you are a resident of the state or not. Which is a positive change – plus, certain property tax breaks used be accessible only in certain counties. Californians with vacation homes, residential homes that are for rent, or commercial properties (owned outside any corporations, partnerships, limited liability companies, etc.) may not be able to avoid property reassessment, and may have to face property tax reassessment burdens, and may want to seek legal counsel or help from a trust lender or property tax specialist or consultant.
As of Feb. 2021, so-called “tax basis portability” has been available to beneficiaries and homeowners, under the new Proposition 58 quasi-replacement, CA Proposition 19. Tax basis portability is a way to reduce the assessed value of your home. As a result, you have the generally significant benefit of lower property tax liability.
With “tax basis portability”, you can transfer the old assessed value of your previous home, to your next home. For instance, if you own a house with an assessed value of, say, $400,000. You sell it for $600,000, and purchase a house for, let’s say, $550,000. So rather than a new reassessed value of $550,000, you can apply to reverse the value of the property back to the previous assessed value of $400,000. Therefore, the lower value can shave roughly $1,800 off your property taxes every year. OK, it’s not a million dollars, but it adds up…
As long as you can verify that you are –
age 55 or older;
or severely disabled;
or own a home that has been significantly damaged by forest-fire or wildfire, or a natural disaster, such as a flood.or severely disabled;
plus, are inheriting a home that was a principle residence; and are moving into the property only as a principle residence.
“Portability” is language used to define estate tax law that enables a surviving spouse to use an estate tax exemption left by a deceased spouse to protect valuable assets during the surviving spouse’s life, or at the surviving spouse’s death.
Potential Issues with a Replacement Property
A “replacement property” can be purchased prior to the sale of home you are currently living in. Of course there may be some problems property tax relief critics, realtors, politicians, and the Legislature doesn’t like to acknowledge – such as the size of an inherited home, your family may be way too large for it. Or the inherited home may be in an undesirable area.
If you have children in school, the school in the new school district you may find yourself in might be completely inferior to the previous school, upsetting your children. Or your commute to work may end up being an extra 4 hours on the freeway, getting to and from your new inherited home!
These issues can be exhausting and debilitating in the long run. Certainly something to consider. In a perfect world, these issues would not surface and become a big problem when you inherit a home from a parent. However, it’s generally not a perfect world.
Improvements to Propositions 60, Prop 90 & 110
Revisiting several of the new property tax relief options… One can safely say, despite components that are perhaps not so helpful – that Proposition 19 is, in some ways, less restrictive than the old Proposition 60, Prop 90, and Prop 110. There are no more county or sales price restrictions, and people can use the Proposition 19 property tax benefit more than once in a lifetime.
Proposition 19 Benefits
a) County restrictions are eliminated… The older rules limited the location of the properties in question. Proposition 60 restricted the tax basis portability within one county. Proposition 90 expanded that to a certain list of counties, so you could sell in one county and buy in another, but only if they were on that list.
b) Under Proposition 19… instead of limiting the counties of transfer, you can use this benefit anywhere in California.
c) No more sales price restrictions… Under Propositions 60 and 90, only transfers of “equal or lesser value” were eligible for tax basis portability.
d) A transfer of low tax basis… is now enabled by Proposition 19, regardless of value. However, certain adjustments to the tax basis are required if the purchase price of the replacement property is higher than the sale price of the previous home.
New Proposition 19 Restrictions for Inherited Properties
On the other hand, under Proposition 19, beneficiaries could see a substantial increase in their property taxes for inherited property. While property tax relief in California had no exclusion or exemption limitations under Proposition 58, current property tax law exclusions under Proposition 19 apply strictly to the first $1,000,000 of inherited property value.
For instance, should your inherited property (i.e., primary residence) be assessed with a market value of $2,000,000 upon transfer to you as the official beneficiary, newly assessed value will be $1,000,000. In other words, $2,000,000 minus $1,000,000 (i.e., the first $1,000,000 of property value) – will equal a $1,000,000 limited exclusion.
Although you are most likely aware of other changes and limitations imposed on California property tax relief, it bears repeating. As a beneficiary inheriting CA property taxes from a dad or mom, you now have to reside in a home only as a primary residence, if you are to take advantage of the Proposition 19 tax break, providing an exclusion from property tax reassessment at current market rates. You can no longer receive an exclusion from reassessment for an investment property.
Some say the underside to this reveals a change that mainly benefits the realtor community in California – using the Bridges family as their one and only singular example of inheriting CA property taxes from a wealthy parent, in this case a luxury beach- front property being used as a lucrative investment property; saving a great deal in taxes – while renting out to wealthy vacationers for $15,000 per month.
For whatever reason, critics of property tax relief have as yet produced very few specific examples of this type of inherited property used for “rental revenue” purposes, as opposed to “primary residential” purposes. Incredibly, the property tax law removing Prop 13 and Prop 58 property tax breaks from investment properties is apparently based on this one oft-told, tired tale of the Bridges family!
As you probably also know – as an inheritor, you have only 12-months in order to establish your inherited property as a principal or primary residence, to avoid property tax reassessment. However, if your inherited property value is more than $1,000,000 over the original tax basis, you are most likely still facing property tax reassessment – and this can hit the pocketbook hard. This may encourage you to sell out, if that’s the case.
Help From Property Tax Specialists
If you don’t want to sell your inherited home, you may be inclined to enlist the help of a property tax consultants for example (great proponents of property tax breaks, and supporters of Propositions 13 and 58); or a trust lender like Commercial Loan Corp, with a loan to an irrevocable trust – and buyout your siblings, if you have siblings, who prefer to sell their property shares from the same inherited property you have received from your parents.
You can establish a permanent, low Proposition 13 tax base this way, and take over 100% of the inherited property equity, with the trust loan paying off anything owed on the inherited home. Plus, your siblings will end up with a good deal more cash from the trust loan than if they had sold out to an outside buyer.
Proposition 19 Changes to the CA Parent-Child Exclusion
Let’s say a parent owns a home that is his or her primary residence plus a rental property (such as an apartment building or commercial building) in California. The home has an assessed value of $500,000 and a fair market value of $3,000,000. The rental property also has an assessed value of $500,000 and a fair market value of $2,000,000. Even though these properties have different current market values, their property tax liability is similar because they have the same assessed value. The combined annual property tax of both properties with a property tax rate of 1.25% is $12,500.
Prior to Proposition 19: Let’s say the parent in this example wanted to transfer both properties to his son. There was no reassessment on the transfer of either the home or the rental property from father to son. The home before Proposition 19, under Proposition 58, could be transferred to the son irrespective of its’ value, since it was the father’s primary residence, and the assessed value of the rental property falls below the $1,000,000 threshold.
Therefore the combined annual property tax stays at $12,500. Moreover, there were no restrictions on the son’s usage of either property – therefore the son might have used both properties as investment properties if that is what he wished to do.
Outcomes Under Proposition 19: Let’s say new assessed value of a house is $2,000,000 since the current market value is larger than the assessed value by more than $1,000,000 (i.e., the new assessed value has a current market value of $3,000,000 minus $1,000,000). The new assessed value for the rental property is its fair market value of $2,000,000 because no exclusion or exemption from reassessment at current market rates applies to transfers of property from parent-to-child other than a primary residence.
Yet if it is indeed a principle residence that beneficiary or heirs are moving into, in keeping with the 12-month inherited property move-in deadline – all the bells and whistles really are still there to be taken advantage of – such as inheriting CA property taxes from parents, having the right to continue transferring property taxes while avoiding property tax reassessment, while being able to use a Proposition 19 loan to an irrevocable trust to keep a parents low property tax base as well as buying out siblings’ inherited property shares – formerly a Proposition 58 transfer of property between siblings…
By the same token, heirs or beneficiaries of inherited property can make full use of any property tax transfer as long as these new restrictive requirements are met… an inheritor can transfer parents property taxes and likewise keep parents property taxes thereafter upon inheriting CA property taxes from ones’ father or mother – and complete the process with a parent-to-child transfer and parent-child exclusion. Californians are still able to successfully avoid property tax reassessment by inheriting CA property taxes from parents, in the final analysis, keeping a low property tax base when inheriting a home. The key to property tax relief in all 58 counties in California.
The new combined annual property tax will be $50,000. In addition, the son has to use the inherited family house as his primary residence or that property is sure to be reassessed at the current market value of $3,000,000, which will increase the combined annual property tax for both properties to $62,500.
You see the difference? This accounts for the growing push-back on Proposition 19…despite all the positive elements that come with this property tax measure.
