New CA Parent-Child and Grandparent-Grandchild Property Transfer Rules Under Proposition 19

California Prop 19 Rules for Transferring Property Taxes

California Prop 19 Rules for Transferring Property Taxes

As an updated review of sorts, we would like to revisit certain Proposition 19 issues governing California property taxes. These issues have become particularly important to beneficiaries and new homeowners in particular throughout the state. The following updates address measures that are especially popular with homeowners…

In terms of basics, it’s important to reiterate that under Proposition 19 an inherited home can be transferred from a parent to their child/heir without triggering property tax reassessment, with the right to keep parents CA property taxes. However it’s essential these days to pay more attention to deadlines and filing stipulations — whereas previously this was not as necessary.

Beneficiaries frequently want to know if a parent died prior to Feb 16, 2021, but the change in ownership forms were not filed with the assessor until after Feb 16, 2021 — if the parent-to-child exclusion (from current property tax rates) is applied under former Proposition 58 measures, or if it is applied under current Proposition 19 tax measures, with the ability to keep parents CA property taxes…. The confirmed answer is that an inherited property transfer is calculated by date-of-death to determine the official date of change of ownership.

A good number of trust beneficiaries inheriting real property from a parent, considering their option to buyout siblings’ inherited property shares, often ask trust lenders if a parent is leaving a family home to three siblings/heirs, will that family home be the primary family home of all three heirs — or just the one heir.  And it turns out that only one sibling/heir is expected, under California tax law, to take over that family home as a primary residence. Yet all three siblings still have to be valid heirs.

Beneficiaries and heirs of an active estate, inheriting assets, often ask their attorney about the correct time-frame to establish an inherited family property as their “primary family home”…  Estate attorneys typically confirm that beneficiaries inheriting a house from a parent who wish to keep parents CA property taxes on a property tax transfer, when inheriting property taxes, are expected to establish that house as their “principle family residence” within 12-months of the purchase or transfer of that inherited property, if they want to avoid property tax reassessment using their existing ability to transfer parents property taxes, when inheriting property taxes from a parent. 

Yet heirs are still being able to take advantage of their right to a parent to child property tax transfer on an inherited home  and a  parent-to-child exclusion; even with all these confusing and sometimes baffling new rules for property tax transfers in California  additional intra-family options are available to heirs such as buying out co-beneficiaries’ property shares on a sibling-to-sibling property share while keeping a low property tax base when inheriting a home.

If beneficiaries or heirs are inheriting a family farm, they often look to their estate lawyer, or trust lender, for answers… if they are looking to buyout co-beneficiaries to retain the inherited property for themselves – at their parent’s low property tax base – to find out if the Proposition 19 parent-to-child exclusion (from current tax rates) also applies to family farms.

In other words, does a family farm also have to be a principal or primary residence of the inheriting beneficiaries or heirs… And the answer is no, the family farm does not have to be the principal residence of the inheriting parties in order to qualify for the parent-to-child exclusion. A family farm is viewed as any real property which is under cultivation or which is being used for pasture or grazing, or that is used to produce an agricultural product.

Many Californians want to know if Proposition 19 is retroactive; if property transfers that have already benefited from Proposition 58 parent-to-child exclusion benefits are going to be reassessed… And they are informed that Proposition 58 applies to transfers that were implemented on or prior to Feb 15, 2021. The current Proposition 19 ability to keep parents CA property taxes applies only to transfers that take place happen after Feb 16, 2021.

An inherited house, when transferred from a parent to their child/heir – is expected to be the “primary family home” of an heir. Beneficiaries or heirs frequently ask their property tax consultant or attorney how long they need to reside in or maintain their inherited property as “a primary family home” to be able to retain the parent-child exclusion. The answer is unequivocally that the Prop 19 exclusion applies only as long as the heir, or beneficiaries, reside in inherited  property as their “principle family home”.

In the event that a family home is no longer used as the primary residence of a beneficiary inheriting a home, that property should receive the factored base year that applies, had the family home not qualified for exclusion at the time of purchase or transfer. The new taxable value will be the fair market value of the home on the date of inheritance, adjusted yearly for inflation. 

Hence, an updated look at certain new parent-child and grandparent-grandchild property transfer rules and regulations under Proposition 19. 

How the Role of a Trust Lender Can Impact Beneficiaries in California

Trust Loans in California

How to get a trust loan in California

As most Californians know, property tax measure Proposition 13, voted into law in 1978, capped property tax rates at 1%–2%. Property could now be reassessed on a property transfer from parent to child, with the right to transfer parents property taxes protected by the parent-to-child exclusion which was folded into tax measure Proposition 58, voted into law in 1986, and as you know is now revised, having morphed into 2021 Proposition 19 property tax law, with new rules for property tax transfers in California…

This continued the exemption for property transfers between parent and child, avoiding property tax reassessment with the right to transfer parents property taxes when inheriting property taxes from a parent; with the ability to keep parents property taxes long-term with this type of standard Proposition 19 protected property tax transfer, parent to child transfer and of course parent to child exclusion.

When there is only one heir, child of the parent, property transfer is relatively simple, knowing you have the right to transfer parents property taxes involving only one heir.  Conflict typically surfaces only when there are two or more siblings inheriting property shares… with one heir looking to retain the parent’s home, while the other heir or heirs insist on selling off their inherited property shares; generally calling for a “non-pro-rata” trust distribution, meaning that each heir with an interest in the inherited property receives an equal proportion of the entire estate with the help of a trust lender and a Prop 19 trust loan – however not necessarily of each asset. It’s important to note that non-pro-rata distribution by a trustee can have a major impact on property taxes.

Not using a Prop 19 trust loan solution, the use of personal funds to pay off a sibling co-beneficiary’s interest in a home would be viewed as a “change in ownership” therefore the outcome of this transaction would trigger property reassessment of that beneficiary’s inherited property share. If there are two heirs, each having inherited 50% of the property, the remaining 50% would be open to property tax reassessment. On the other hand, if there were three beneficiaries and only 1/3 of the property were retained, 2/3 beneficiary interest being bought out – 2/3 of the property would be vulnerable to property tax reassessment.

However, with the help of a trust lender funding an irrevocable trust, buying out the beneficiary or beneficiaries looking to sell off inherited shares – the fact that the trust is actually borrowing the funds to equalize distribution to the siblings that are selling out, and funding is not in fact distributed to the sibling or siblings themselves – property tax reassessment is successfully avoided.

For example, let’s examine the Anderson family in North Hollywood, who owns a home valued at $800,000, free and clear of any debt. In other words the family owns the house outright. Assessed value is $100,000. Let’s say, for the sake of argument that sibling Nina insists on selling the home, and wants a cash for her share; while another sibling, Jasper, is determined to keep the home.

(Option A) Jasper cleans out his savings account and pays out $400,000 to buy out Nina’s inherited property shares. This results in a “change of ownership” with respect to Jasper’s 50% property buyout, and the assessed outcome is a 50% property tax reassessment with a significant increase in property taxes.

(Option B) Jasper enlists the help of a trust lender, who provides a $400,000 loan to an irrevocable trust, along with getting approval to allow the trust loan to work in conjunction with Proposition 19; enabling Jasper to keep his parent’s low Proposition 13 protected property tax base. The third-party trust lender also sees to it that that funds are distributed equitably to Nina – in fact with more cash than any outside buyer would be likely, realistically, to offer – with no change in ownership, and no property reassessment; and therefore no property tax hike. The trustee at this point transfers the entire property to Jasper who plans to pay off the $400,000 loan to the irrevocable trust by cashing out a life insurance policy.

Thad Farrell, Proposition 19 / trust loan account manager (Commercial Loan Corporation at 877-756-4454) at the Commercial Loan Corp trust lending firm in Newport Beach, sums up the process as follows:

Usually siblings that want to retain inherited property from parents come to us first, generally after being referred to us by a law firm. Middle class families that can’t afford to pay reassessed taxes on an inherited home… Which pretty much sums up most families these days! Siblings inheriting a home have two options. They can sell or keep their inherited property. In other words, your family has to make up their mind – what they want to do, sell or keep. Selling it is far more expensive. By keeping the home, each beneficiary looking to sell out receives approximately $15,000 extra in a cash trust distribution when compared to selling the home to a regular buyer; because they avoid costly realtor and real estate sale expenses. A realtor typically charges 6%, there can be costs to prepare the home for sale and closing costs such as title, escrow or assistance with buyer closing costs on top of that… Each beneficiary keeping the inherited home winds up saving on average $6,200 (each) in yearly property taxes. So do the math, for starters. Whereas, if the property is reassessed – the cost can be very high.

At the end of the day, there are positive emotional outcomes from this process as well as financial savings and extra funds… However the key result is the fact that when everyone walks away from using a trust loan to take advantage of the proposition 19 parent to child property tax transfer, they all understand that they have just completed a win-win transaction… In other words, unlike most business transactions where there is often a winner and a loser – in this scenario everybody wins and no one loses.

 

New Rules For Property Tax Transfers In California

Rules for California Property Tax Transfer

The new rules for California Property Tax Transfer in 2021

To Transfer Property Taxes: New Rules & Regulations 

When Proposition 19 was voted into law in Nov 2020, taking affect in Feb of 2021 – a learning curve was suddenly in effect for new homeowners and beneficiaries inheriting property from parents. It became essential, especially for middle class and upper middle class families, to quickly learn about changes to tax relief laws that would impact both existing trusts and inherited real estate.

For example, a “qualified personal residence trust” (QPRT), which is a trust that is established with the intent of allowing parents to continue to live in a house; and once that period of time has ended the balance of the interest is transferred to beneficiaries.

Put simply, a QPRT is a special kind of irrevocable trust that allows the person who created it to remove a primary residence from his, or her, estate so gift taxes can be reduced when transferring assets to a beneficiary.

Buying Out Sibling Property Shares While Keeping Your Inherited Home at a Low Proposition 13 Tax Base

As many Californians know, a loan to an irrevocable trust can also be used to buyout siblings’ property shares, inherited from a parent… while allowing beneficiaries who wish to retain that property, to transfer property taxes and keep that home at their parents’ low Proposition 13 protected tax base. It’s essentially a home equity loan on inherited property, made to the trust.

What a lot of people don’t know is the fact that the trustee and beneficiaries who are intent on keeping their inherited property will frequently borrow money to have their trust funded by a qualified trust lender licensed in the state of California so that an equal distribution of the trust can be made in order to meet California Proposition 19 Board of Equalization requirements.

Typically, beneficiaries enlist funding from a trust lender when a trust does not have sufficient cash to make an equal distribution to all the beneficiaries who are looking to sell their inherited property. Hence, the ability to transfer property taxes, mainly to transfer parents’ property taxes; and avoid property tax reassessment of an inherited home. Usually a savings of over $6,200 per year in property taxes. 

Avoiding ‘Fair Market Rates’ with Proposition 19 Trust Loan Exclusion from Property Reassessment

Changes to California property tax relief in 2021 are a challenge to  understand.  Trusts, Californians have discovered, are now used for more purposes than merely deferring property taxes for a few months. Californians have also discovered that they can avoid being reassessed at fair market rates by moving into inherited property as their principle residence  – bearing in mind a $1,000,000 cap on an exclusion from existing property tax rates.

The benefits of making a lifetime transfer of inherited property has to be compared to a transfer at the passing of a parent, which may cause you, as an heir, to inherit a “stepped-up basis” in transferred property. In other words, when you inherit assets that increased in value from when your deceased parent owned it, the asset’s “basis” is increased to the property’s current or “fair market” value on the date of the parent’s passing.  Unless you take steps to avoid this increase, to be able to transfer property taxes successfully, and avoid property tax reassessment altogether!

Saving Money on Property Taxes With Help From Experts!

When purchasing a new home or inheriting your parents’ residence
it makes sense to call a specialist experienced in the use of irrevocable trust loans to maintain your parent’s low property tax base, for example like the Michael Wyatt Consulting firm out in Corona, CA.  If you are inheriting a home, or expect to inherit a home and plan to transfer the low property tax base to a new home down the road, through an irrevocable trust loan in conjunction with Proposition 19, or Prop 58.

If you’re inheriting a home from a parent and wish to avoid property tax reassessment you still have all the tools to do so, as long as all new requirements are met.  If you’re a beneficiary, a brand new homeowners, you can  transfer parents property taxes when inheriting property and thus inheriting property taxes; with the ability  to keep parents low property tax base, as long as you live in your inherited home. 

Michael Wyatt, an Expert on CA Tax Savings for Homeowners Shares His Viewpoint on  Keeping a Low Property Tax Base

As Michael Wyatt of Michael Wyatt Consulting, tells us: 

When it comes to keeping a low property tax base, with Prop 58 [or now Prop 19] and a trust loan, I always bring my clients to Commercial Loan Corp.  Their loans to trusts give my clients several invaluable benefits. Their terms can be a lot more flexible than an institutional lender like Wells Fargo or Bank of America.  They’re self funded, and that’s why they can extend easier terms to clients…

When your parents die, and your trust agreement says ‘equal shares’  –  That means equal shares!  People basically just get the overall concept of getting money from a trust loan even if it doesn’t sell. It makes more sense all around to get a trust loan; and everyone gets more money.

Regarding the ever-present issue concerning families deciding to either sell inherited property; Or opting to keep property inherited from their parents – Mr. Wyatt  weighs in, telling us: 

More heirs and beneficiaries end up not wanting to sell their inherited property. And  if they did want to sell, a lot of people can be easily convinced, with more cash from a trust loan and trust lender than an outside buyer would come up with, ‘equalizing’ things for them…

You have to look at it this way: there are always  one or two, minimum, who  insist on selling their shares in an inherited property. And there is our initial client contact, with those who want to sell.  And that is where these family estate or trust conflicts begin.  If they sell their property, capital gains tax always hits them. That’s where a trust loan comes in, to avoid that.

A trust lender like Commercial Loan Corp, that doesn’t charge any fees up-front, that’s another great benefit.  Plus, they don’t charge interest on their trust loan in advance. Not only that, there is never a “due-on-sale” clause… that requires the mortgage to be repaid in full when sold; or that all or some of the interest owed must be paid up-front to secure the mortgage. No “alienation clause”… in the event of a property transfer, stating the borrower has to pay back the mortgage in full before the borrower can transfer the property to anyone. 

Going with a firm like that – all costs are offset, unless you plan to keep a property for 2, 3 years or less. Then it doesn’t make sense. But generally you’re looking at keeping that property for seven or more years, as a rule...”

To learn more about your options when inheriting a home from parents – transferring a low property tax base to your new primary residence – contact Michael Wyatt  Consulting, or the Commercial Loan Corp, at (877) 756-4454 to speak with a Trust Loan or Property Tax Savings specialist. Chances are the end result will be a much lower property tax bill.

For more information on California Property Tax News, visit the PropertyTaxNews.org website for all of the latest information and updates. 

Intra-family Loans to Purchase Real Property vs Intra-Family Trusts & Trust Loans

Family Trust Loans

Family Trust Loans

Intra-family loans, to purchase a home or other big ticket items, are sometimes confused with intra-family trusts involved with  buying out a sibling inheriting property, or several beneficiaries who have inherited property from parents yet wish to sell off their property shares to an outside buyer, keeping a low property tax base or a loan to an irrevocable trust that is also associated with exclusion from property reassessment.  

Components of these processes have been discussed on a number of high-end websites at length, such as National Review who informs us in no uncertain terms, that:

“… many clients use intra-family loans to assist a relative with the purchase of a residence, the funding of a business venture or an investment in any other asset. If properly structured, intra-family loans also provide clients with an excellent tax planning strategy. To avoid having any part of an intra-family loan considered a gift for tax purposes, a client should follow specific guidelines, including charging a minimum interest rate, documenting the loan, and requiring payment under the loan terms…”

As well as the ever popular economic bible for serious students of finance, Kiplinger – where they tell us: “Intra-family loans typically use the AFR (Applicable Federal Rate), the lowest interest rate that can be charged on a loan for it not to be considered a gift. The IRS has three rate tiers for the three different “terms” of loans: a short-term loan (0-3 years), a mid-term loan (3-9 years) and a long-term loan (9 years or more).”

If you apply some serious thought to it, you’re bound to come to the conclusion that it makes very little senses to involve the  government in family loan matters.  In fact, it’s not logical to involve the government in any personal matters – financial or otherwise. 

Let’s say you borrow $250,000 from your wealthy Dad – and you pay it back whenever  you pay it back, usually at zero interest, if this even remotely resembles a close family.  If your Dad is going as far as to actually charge you interest it is no ones’ business but your own, between the two of you, as to what the interest might be, or if there even is interest at all, which generally there is not when it concerns internal family lending.   

Although the concept of involving the government in family relationships and intra-family lending is counter intuitive, California intra-family trusts, irrevocable trust loans and exclusion from property reassessment are processes that are unlike any other tax relief or financing anywhere else in the United States – and are extremely useful to both trust lenders and beneficiaries inheriting property from family members, with respect to establishing a low property tax base, as well as buying out co-beneficiaries’ inherited property shares. 

This process moves into some interesting yet often challenging areas when used to resolve inherited beneficiary property disputes and conflicts – typically over retaining versus selling property inherited from parents.… Along with enabling new homeowners and beneficiaries inheriting property to take advantage of  tax breaks under Proposition 19, parent-to-child property tax transfer on an inherited home; and the parent-to-child exclusion from property reassessment on every parental property tax transfer and transfer of property between siblings through trust loan funding; as well as Proposition 19 transfer of property and Proposition 13 to avoid property tax reassessment  when inheriting property taxes, always with the ability to keep your parents’ low tax base for trust beneficiaries,  basically forever. 

Therefore, if you reside in California and are inheriting a home and/or land from a parent who has recently passed – and you prefer to keep your parent’s low  tax rate in addition to claiming an exclusion from property reassessment, along with buying out siblings who insist on selling to an outside buyer – you can always go to a reliable trust lender to accomplish all of the above. 

Moreover, this ensures the siblings you are in conflict with, who are intent on selling out their inherited property shares, that they will  receive a good deal more cash in the transaction that any outside buyer would give them for their property shares… ending as a win-win transaction for all parties concerned.

However, let’s be clear about one thing – it is an intra-family trust that you will be transacting – not an intra-family loan.

Keeping Your Parent’s Low Property Tax Base When Inheriting a Home

Keeping Your Parent’s Low Property Tax Base When Inheriting a Home

Keeping Your Parent’s Low Property Tax Base When Inheriting a Home

How to Keep Parents Property Taxes In 2021

What was once the parent-to-child property tax break called CA Proposition 58 has now morphed into a property tax relief measure to help avoid property reassessment, called CA Proposition 19… active as of Feb 16, 2021.  

Estate and trust lenders are accustomed to teaching beneficiaries and new homeowners freely, in unfettered fashion, how to keep parents property taxes with Proposition 13 or Proposition 58 property tax breaks. But they are still funding trusts with a loan to an irrevocable trust, and helping clients to establish a low property tax base, to avoid property reassessment… Property tax specialists like this are still helping beneficiaries buyout a sibling’s share of inherited property, through a trust loan – the transfer of property between siblings. 

Property tax relief experts are still showing beneficiaries how to keep parents property taxes on a property tax transfer, taking advantage of the parent-to-child transfer or parent-to-child exclusion (from current property tax rates); helping families inheriting a home to transfer parents property taxes when inheriting a home, and inheriting property taxes. 

Help From Experts  

Some California firms with property tax relief expertise have been encouraged to get creative, to meet new property tax challenges and obstacles head on.  Firms such as Michael Wyatt Consulting in Corona who specializes in base year value transfers and parent-child transfer exclusion; real estate issues and property tax relief; or well known trust lender and Prop 58 / Prop19 experts Commercial Loan Corp in Newport Beach, who specializes in irrevocable trust loans and lending.  This particular trust lender is now offering heirs and beneficiaries inheriting a home from parents a free consultation for property tax savings – to help beneficiaries inheriting a home from parents to keep the parents’ low Proposition 13 property tax base; while also taking full advantage of Proposition 19 and Proposition 58.

This type of evaluation for property tax savings is designed to simplify a relatively complex process, helping heirs evaluate the benefits of a loan to an irrevocable trust, specifically for beneficiaries who want to buyout siblings’ inherited property shares, while keeping inherited property at their parents’ low property tax rate – as well as avoiding costly expenses associated with selling property through a realtor.  

The name of the game is to simplify the use of Proposition 19, as well as the transaction between trust lender and beneficiary. A process that is often difficult for families to understand.

Inside View From an Account Manager’s Perspective

One such seasoned proponent of simplification of the Proposition 58,  trust loan process is a highly experienced account manager by the name of Tanis Alonso – a particularly hard working, dedicated senior manager, who works closely with her clients, and frequently their estate lawyer or accountant.

In a recent interview with this blog Miss Alonso described her unique personal approach to planning and implementing estate & trust loans for families; how property tax saving trust loans and Proposition 58 tax breaks factor into her family undertakings and financial proceedings, Miss Alonso tells this blog:

We don’t view each trust loan scenario as simply a ‘financial transaction.’ Nor do we see the home they’ve lived in for decades as just a ‘piece of real estate’. To us, this a ‘piece of family history’ in the making. And the process a ‘family decision,’ not a ‘transaction’…

Let’s say a property value is currently one million dollars and the current tax base is $1,200. If they were to get reassessed at current value that would be around $11,000 annually. By someone keeping the property and obtaining a trust loan to properly buy out their siblings that allows the beneficiary that is keeping the property to keep parents property taxes, to retain 100% of the Proposition 13 tax base that was paid by their parents and keep that low property tax base of $1,200.

This of course creates much greater affordability than if they were to improperly buy out their siblings and have that property reassessed. The loan to trust goes hand in hand with the Proposition 58 property tax transfer system, creating enough liquidity to equalize distributions, not sell, and allow a beneficiary to keep their parents property with their low property tax base.

Feedback From A Seasoned Property Tax Consultant

The other example we mentioned, Michael Wyatt Consulting, works in conjunction with real estate attorneys and frequently a trust lender, and formally reviews clients’ real estate values. The firm studies and forms strategy for proposed real estate transactions; ensuring avoidance of property tax assessment.

Mr. Wyatt conducts comprehensive research on real property, real estate deeds, and other instruments for accuracy; and serves as a liaison between clients and the Tax Assessor’s Office – maintaining problem-free communications with Assessors and other essential local government agencies. Mr. Wyatt explains:

We let our clients know the Proposition 58 [or Proposition 19] tax benefit entitles children of parents leaving them property to preserve the low Proposition 13 maximum 2% tax base. A California property tax transfer. However, a lot of people don’t fully understand that you have to apply for the benefit. It’s not automatic. And it doesn’t apply to the principal home. explain to them that they get the assessed value tax benefit only if it’s a non principal home. You get the assessed value waved if for example it‘s a million dollar property… You get the million excluded – but the overage is reassessed… A lot of people don’t know that.

The creators of the trust get this benefit. definition of ‘a child’ or “children” is typically the adult children of a decedent…But this also refers to step-parents. Step-parents can also transfer property to a step-child… Mom can be a step parent and can still get the benefit. In-laws get the benefit as well. You don’t have to be blood relatives.

We basically introduce the trust lender, for example Commercial Loan Corporation, as a private money lender that loans to irrevocable trusts, that applies for and works in tandem with California Proposition 58 [or Proposition 19]… for beneficiaries who are looking to sell their real property shares – for the purpose of facilitating “non pro-rata distribution”… So every heir gets an equal share of the entire overall estate – however, not necessarily of every asset.

Well, if the family in question uses the Commercial Loan Corp company that we have been using for years… the loan they provide is to a trust, and not to beneficiaries; so there is no title, and no crippling 66.66% property tax reassessment.  Well, for example, there might be three siblings… beneficiaries – and a house to inherit. And this is always important to remember.

If you’re one out of the three siblings that wants to keep the inherited house, you are definitely looking at a 66.66% property value tax reassessment – if you’re operating without a loan to a trust, or you’re using your own cash; or getting money from a very pricey institutional lender – typically with multiple restrictions and extremely strict terms.”

Mr. Wyatt sums up and simplifies a process that tends to look complicated to new clients.  At the end of the day, all families need to understand is the fact that in the end, they save a great deal of money on property taxes if they aim to keep their parent’s home.  If they are looking to sell, they simply need to understand that they will be putting lot more cash in their pocket  using the trust loan approach, rather than selling to an outside buyer.  Everything else is secondary, if you are inheriting property.

If you are interested in finding out how much you might be able to save by keeping a parents low Prop 13 property tax base on an inherited home, we suggest you contact Commercial Loan Corporation at 877-756-4454. They will provide you with a free estimate on what your annual property tax savings will be and provide you with information on the Proposition 19 process.  They can even put you in contact with a trust and estate attorney in your area if needed.

Proposition 19 Impact on CA Homeowners

Proposition 19 Impact on Property Taxes in California

Proposition 19 Impact on Property Taxes in California

Proposition 19 Impact on Property Taxes in California

Now that the popular Proposition 58 tax break system has changed into tax measure Proposition 19 – these are some of the key issues specific to modern Proposition 19 property tax relief.

These changes cover real property parent-to-child transfers after Feb 16, 2021. Whether key outcomes are based on the death of a parent before Feb 16, 2021, or based on deeds filed after Feb 16, 2021, is still questionable, whether Proposition 19 would apply, or if California parent to child exclusion from property tax reassessment, derived from Proposition 58, will apply – with respect to parental property tax transfer.

We believe the bottom line is simply to continue applying political pressure on those in power in this state – to make sure the California property tax system continues to provide genuine property tax breaks for residents, with the ability to avoid property tax reassessment via  Proposition 19 (formerly Prop 58 and its’ parent-child exclusion) in concert with a loan to an irrevocable trust – keeping a low property tax base when inheriting a home, when buying out property shares from co-beneficiaries through a trust loan; with the ability to keep parents property taxes, with the right to transfer parents property taxes, getting the most out of Prop 13 and Prop 19 property tax breaks upon the transfer of a home, when inheriting property taxes. 

Positive Changes Affecting Heirs & Homeowners From Prop 19

1. One major change is that Proposition 19 eliminates the parent-child and grandparent-grandchild exclusion from reassessment for properties other than a primary residence.

2. California homeowners over the age of 55 or with severe disabilities (which is still not defined as to what the exact definition of “severe” is) will have the ability to transfer their current property tax assessed value (i.e., “base year value transfer”) of their primary residence to another primary residence anywhere in California.

This change eliminates the problem of not being able to take advantage  of Prop 58 and its’ parent-child exclusion in all 58 counties in California – in terms of being approved, or not approved, for a base year value transfer. 

In other words, Proposition 19 is strictly statewide, without obstacles blocking your ability to avoid property tax reassessment in some counties, while there is no problem avoiding property tax reassessment in other counties!  That type of bias towards homeowners and beneficiaries in some counties caused a lot of problems in California.

This change enables residents to purchase a more expensive home rather than a more inexpensive home to keep tax the relief benefits of the base year transfer.  If a more expensive primary residence is purchased, there is now a rather complex formula to  minimize the increase in base year value.  Moreover, Proposition 19 now increases the number of times the exclusion may be used, up to three times in a lifetime.

Prop 58 Parent-Child Exclusion Has Morphed Into Prop 19 Property Tax Breaks

Prop 19 Property Tax Breaks

Prop 19 Property Tax Breaks

The Proposition 58 parent-child exclusion and other tax  breaks have now  changed into the Proposition 19 Parent to Child Property Tax Transfer

As most Californians are aware, a home undergoes reassessment at “market value” if it’s transferred, inherited, sold or gifted – and, in turn, taxes on the property often increase significantly. Yet, if the sale or gift or transfer is between parent and offspring, in certain situations, the home won’t undergo reassessment once specific requirements are met and the relevant application is filed properly.

California’s unique Proposition 58 tax break enables new homeowners or beneficiaries to avoid property tax reassessment when inheriting real estate and liquid assets; upon receiving a home or other real estate from a parent – or vice versa. When a home, for example, is sold, given as a gift, transferred as an inheritance, or transferred through a trust.  However, the fact remains – inheriting property taxes from Dad or Mom is now more limited than it was before.

As we know, a new homeowner’s property taxes are calculated through the time honored, low Proposition 13 base year value, typically what parents had paid… as opposed to so-called “fair market value” or “current market value” when new property is acquired – gifted, bought, generally inherited… As most homeowners know by now, real estate transfers excluded from property tax reassessment by Proposition 58 or Prop 193 have to be used as a principal residence (with no value limit). 

For those of you who are extra detail oriented – Proposition 58 is established in section 63.1 of the Revenue and Taxation Code.  It’s also worth mentioning that, with respect to  Proposition 193,  parents of a grandchild do have to be deceased prior to property transfer from grandparent to grandchild.  Alternatively, the grandparent’s child can be deceased, with the surviving parent-in-law being remarried prior to the transfer event.

The below bullet points may untangle some of the confusion that has formed around some of these property  tax breaks.  We need to take note that property tax relief limitations built into Proposition 19 are presently serving as a replacement to the pre-Feb 2021 Proposition 58  parent-to-child exclusion, also referred to as a “parent-child exemption” (from property tax reassessment).

Some of the new Proposition 19 tax breaks are a work in progress,  however most have been given a stamp of approval by the BOE

• Proposition 19 was more or less rushed through the political and electoral process, passed by the CA Legislature in under a week, and placed onto the Nov 2020 ballot, changing the California state constitution without implementing the appropriate statutes. Homeowners’ ability to transfer parents property taxes, in other words the right to keep parents property taxes on any parental property tax transfer, inheriting property taxes from Dad or Mom… and enabling heirs to keep parents property taxes are sill in place as valid tax breaks, allowing beneficiaries or heirs to avoid property tax reassessment – the process is just more limited than it was previously. 

Moreover, establishing a low property tax base along with the transfer of property between siblings, sibling-to-sibling property transfer – buying out a sibling’s share of inherited property through a trust loan, in conjunction with Prop 58, is still firmly in place, however inheriting property taxes from Dad or Mom is now limited somewhat by Proposition 19. Similar limitations are now in place as well concerning the process of inheriting property taxes from a parent, the parent to child transfer and exclusion for reassessment of property taxes, or parent-child exclusion (from property tax reassessment at current market rates).

• Sections of the approved documentation and revisions to various sections are vague at best and often unclear

• To correct these issues, Santa Clara County Tax Assessor Larry Stone was appointed by the California Assessors’ Association (CAA), with four other tax Assessors, to a hastily formed CAA “committee” to try to provide some clarity to the new Proposition 19 implementation process.

• The CAA “committee” has enlisted supposed specialists and tax lawyers throughout California, and is working with the Board of Equalization (BOE) to furnish guidance and where necessary recommend passage, on an urgency basis, towards implementing appropriate statutes.

• Homeowners over the age of 55 (or “who meet other qualifications” which remains vague) would be eligible for property tax savings when they move. To avoid property tax reassessment at current or “fair market” rates, beneficiaries inheriting property from parents must move within 12-months into an inherited home, using this property only as a primary or principle residence.

• Likewise, the parent leaving the home to beneficiaries must have been residing in that home as a principle or primary residence. Apparently, going forward into 2021 and beyond, there will be no exceptions to these new rules and regulations.

• Only inherited properties used as primary homes or farms would be eligible for property tax savings. Those who are “severely disabled”, or whose homes were destroyed by wildfire or a “natural disaster” can now transfer their primary residence’s property tax base value to a replacement residence of any value, anywhere in the state.  This was considerably more limited prior to Feb 2021.

• Eligible homeowners can now take advantage of “special rules” to move to a more expensive home. Their property tax bill would still go up but not by as much as it would be for home buyers that are “not eligible”.

• Eligible homeowners may use these “special rules” three times in a lifetime. (for declared disaster victims, there is no limit on the number of times these benefits can be used.)

Filing Requirements

A claim form must now, as of Feb 2021, be completed and signed by the transferors and transferee and filed with the Assessor. A claim has to be filed  within three years after the date of purchase or transfer, or prior to the transfer of the real estate to a third party, whichever is earlier.

If a claim form has not been filed by the date specified above it will be timely if filed within six months after the date of mailing of the notice of supplemental or escape assessment for this property. If a claim is not timely filed the exclusion will be granted beginning with the calendar year in which you file your claim.

Assembly Member Kiley Introduces Constitutional Amendment 9 to Block CA Property Tax Hikes

Reinstate Propositions 58 Property Tax Transfer In California

Will California Reinstate Propositions 58 Property Tax Transfer Laws?

Assembly Constitutional Amendment 9 (ACA 9) has been introduced by Assemblyman Kevin Kiley, of Granite Bay, CA – to formally reinstate Propositions 58 and 193, and return the parent-child exclusion to full unlimited measure; without imposed limits, to the CA state constitution – restoring the ability of parents and grandparents to pass on property to the next generation without any deceptive obstacles and/or property tax increases.

The CA Legislature Assembly Constitutional Amendment 9 was  introduced by Assembly Member Kiley on May 03, 2021, regarding property taxation & the transfer of an inherited home to a principal residence, for beneficiaries. 

ACA 9 is written into the official California record, as follows:

The California Constitution limits the amount of ad valorem taxes on real property to 1% of the full cash value of that property, defined as the county assessor’s valuation of real property as shown on the 1975–76 tax bill and, thereafter, the appraised value of the real property when purchased, newly constructed, or a change in ownership occurs after the 1975 assessment, subject to an annual inflation adjustment not to exceed 2%…

The California Constitution, until February 15, 2021, excluded from classification as a “purchase” or “change in ownership” requiring reappraisal the purchase or transfer of a principal residence and the first $1,000,000 of other real property of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased.

On November 3, 2020, the voters approved Proposition 19. Pursuant to Proposition 19, the California Constitution, on and after February 16, 2021, removes the above-described exclusion from classification as a “purchase” and “change in ownership” requiring reappraisal, and instead excludes from classification as a “purchase” and “change in ownership” the purchase or transfer of a family home or family farm, as those terms are defined, of the transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased, if the property continues as the family home or family farm of the transferee. In the case of the exclusion so provided to a transfer of a family home, the California Constitution, pursuant to Proposition 19, requires the transferee to claim the homeowner’s or disabled veteran’s exemption within one year of the transfer.

This measure would repeal the above-described provisions of Proposition 19. The measure would reinstate the prior rule excluding from classification as a “purchase” or “change in ownership” requiring reappraisal the purchase or transfer of the principal residence and the first $1,000,000 of other real property of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased. The measure would apply retroactively to all effected purchases or transfers occurring on or after February 16, 2021.

Prior to 1978 with the advent of Proposition 13 becoming law, capping property tax reassessment at 2% for owned property in California, residents found themselves paying arbitrary property tax hikes more and more often, with elderly homeowners, living on a modest fixed income, being evicted when they couldn’t pay egregious tax hikes, which started to become a frequent event; and began to alienate and anger the middle class public, to an extreme degree.  It wouldn’t be an over-statement to say this widespread displeasure opened up the doors wide for a tax break like the parent-child exclusion!  Property tax breaks that enabled the middle class all across California, when inheriting property from parents, to feel justified, just like the wealthy, to be keeping a low property tax base when inheriting a home.

Middle class residents in Californians, and working families, were frustrated that rapidly rising property values had turned property taxes into what was effectively a “death tax”.  It was this overall response from the public throughout the state that left events wide open, in terms of following and supporting Howard Jarvis and his Taxpayers Association – adopting the property tax relief measure they called Proposition 13.

Under Proposition 13, which passed in a landslide in 1978, property tax assessments could no longer increase more than 2% per year until, or unless a new owner took over the property, which triggered a reassessment at current market rates. Middle class offspring inheriting their parents’ home usually figured out right away that they were going to have a real problem paying reassessed property taxes, as that tax bill was typically more than most middle class families could afford to pay every year. 

So in 1978 Californians happily accepted the ability to keep parents’ property taxes, transfer parents property taxes, and inheriting property taxes instead of paying egregious tax hikes.  The right to finally have access to  a property tax transfer from a parent, a parent-child transfer, or parent-child exclusion, was huge for California property owners… in fact, even for renters.  And certainly for residential and business, or commercial, property owners.

Then, having tasted some of “the good life”, in terms of saving on taxes,  formerly enjoyed only by the nouveau riche and old money, Californians, in 1986, voted in high numbers and passed a  measure called Proposition 58 with the approval of more than 75% of California voters.  This amended the California constitution, to state that the transfer of real estate between a parent and a child, generally property transferred from parent to an heir, would not be considered a “change of ownership” and would fall under a new property tax reassessment exclusion, something they called “a parent-child exclusion”; capping their property tax bill at the same rate their parents paid.

A decade later, voters approved Proposition 193 to apply the same exclusion as the parent-child exclusion, except it covered property transfers between grandparents and grandchildren – as long as the children’s parents were deceased.  California Proposition 193 grants the same rights to a grandchild as Proposition 58 grants to a child.

Under Proposition 58 and Proposition 193, working families could transfer a home of any value plus up to $1,000,000 of assessed value of additional real estate. This protected families that owned a small business, or a condo or duplex that was rented out for income, or a vacation property.  Therefore the death of a parent would not trigger a sudden reassessment of these properties at current high market rates, increasing yearly property taxes to such a degree that middle class beneficiaries would be forced to sell their inherited property shares right away.

Jon Coupal, president of the Howard Jarvis Taxpayers’ Association, summed up this proposed tax measure in the Daily Breeze on May 9, 2021 in clear fashion, when he said:

…a slick advertising campaign for Proposition 19 tricked voters into repealing Propositions 58 and 193 without realizing the impact it would have on their own families. Prop. 19 replaced the parent-child transfer exclusion from reassessment, which has been in the state constitution for 35 years, with a narrow exclusion that only applies to homes that the heirs move into within a year and make their permanent principal residence.

These harsh provisions took effect with lightning speed in February, at a time when families were prevented by the pandemic from meeting with other family members, attorneys or tax advisers. Many people are just now finding out what happened. Letters are going out from county assessors to grieving families advising them of their new tax obligations.

This must be fixed. And it can be if Californians make their wishes known to elected representatives. ACA 9 would preserve family businesses, affordable rental properties, and home-ownership for families that otherwise would lose the benefit of the hard work their parents put in to secure their futures.

We couldn’t have said it any better ourselves.

Unexpected Limitations Imposed on the CA Parent-to-Child Exclusion From Current Property Tax Rates

The California Parent-to-Child Exclusion for Property Tax reassessment

Keep a parents property tax rate on a home you inherit.

Parent-to-Child Transfer to Avoid Property Tax Reassessment

The ability to avoid property tax reassessment in California through Proposition 13 and Proposition 58 or Proposition 19 is not available only to families that own shopping centers, office buildings or apartments – it’s there for every middle class beneficiary and working family inheriting property from parents – to take full advantage of.  Despite limitations now imposed on some of these property tax relief measures, as of 2021.  It is still there to utilize, and unlike most tax loopholes and tax breaks, it’s not just for the wealthy.

Californians have relied on the Prop 58 parent-to-child transfer and Proposition 193 (grandparent-grandchild exclusion) to transfer California real property to children and grandchildren without property tax reassessment.  Until February 16, 2021, parents could transfer ownership of a principal residence of any value and up to $1 million of assessed value (per parent) of non-principal residence property (vacation and rental homes, commercial property, etc.) to one or more children or one or more irrevocable trusts exclusively for one or more children without property tax reassessment.

Admittedly, Proposition 19 changed those rules. Starting February 16, 2021, the ability for a parent to transfer to heirs up to $1,000,000 in assessed value of a home or real property of any kind that is NOT being used as a primary residence – is no longer possible in most cases.

Previous ability for a beneficiary or heir to avoid property tax reassessment of inherited property that is not being used as a primary residence by the parent, i.e., the decedent, or by the beneficiary or heir inheriting the property – no longer exists; unless things change.  In other words – inherited real estate being used as investment property, and rented out to vacationers, is no longer possible.

However, the process of inheriting property while keeping a low property tax base with the use of a trust loan from a trust lender, while buying out a sibling’s inherited property shares is still very much alive and well in California.  You simple  need to know how to take advantage of the system properly.

So to reiterate, the transfer of a non-primary residence now must be reassessed at what attorneys call “fair market value”, simply meaning current high property tax rates… Except when beneficiaries are using the residence as a primary or principal residence; and the current property tax rate of the residence at the time of transfer does not exceed the parent or decedent’s so-called “assessed value” by more than $1,000,000.  

Assembly Constitutional Amendment 9: Efforts to Reinstate Prop 19

If the inherited residence exceeds the assessed value by more than $1,000,000 the inherited property’s assessed value will be assessed at current market rates – minus $1,000,000.  And these changes are what Jon Coupal at the Howard Jarvis Taxpayer’s Association and political friends of theirs are trying to walk back or permanently stall with their Assembly Constitutional Amendment 9 (i.e., ACA 9), introduced by the young CA Assemblyman, Mr. Kevin Kiley.

 

 

What CA Beneficiaries, Trustees & Homeowners Need to Know

New California Prop 19 Property Tax Transfer

New California Prop 19 Property Tax Transfer

Tax Basis Portability

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 –

  1. age 55 or older;
  2. or severely disabled;
  3. 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;
  4. 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 consultant like Michael Wyatt Consulting, or Devin Lucas Real Estate 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.