Avoiding Property Tax Reassessment When Transferring an Inherited Home

Avoiding Costly Property Tax Reassessment On An Inherited Home

How To Avoid Property Tax Reassessment On An Inherited Home

Should I Give My Home to My Children as “a Gift”?

Many people wonder if it is a sensible idea, given their personal tax situation, to give their home to their children as a gift.  For middle class or upper middle class families this really is a moot question, as the threat of steep taxation clearly applies only to folks with high net worth.  Bottom line, you can gift $11.58 million over an entire lifetime without bring hit with a gift tax. 

How many people do any of us know who will  be giving away over eleven million dollars in real estate over the next 50 years?  Think for a moment how wealthy you would have to be in order to give away over eleven million dollars in property to your children.  Regardless,   giving away a house to offspring can have a variety of peculiar financial or tax consequences, among other outcomes. 

In 2021, and the years following, the annual “gift tax exemption” will stay at $15,000 per recipient. This means you can give up to $15,000 to as many people as you want during the coming year without any of it being subject to a gift tax.

A gift tax is imposed if you transfer money or property to another person without receiving at least equal value in return. This could apply to parents giving money to their children, the gifting of property such as a house or a car, or any other transfer. There is also a lifetime exclusion of $11,700,000. The very idea that any entity outside a family group can make decisions on taxing what a family does or does not do with their real estate is a most unpopular idea among most citizens.

Being Aware of all Consequences, Giving Your Home to Heirs

ElderLawAnswers.com weighs in on this issue, which is highly appropriate, as these writers and editors frequently deal with tax problems facing older Americans. June 23, 2020 they published an article entitled “Giving Your Home to Your Children Can Have Tax Consequences”

When you give anyone property valued at more than $15,000 in any one year, you have to file a gift tax form. Also, under current law (2020) you can gift a total of $11.58 million over your lifetime without incurring a gift tax. If your residence is worth less than $11.58 million, you likely won’t have to pay any gift taxes, but you will still have to file a gift tax form.

While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000.

If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up,” which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust, or selling it to them. Before you give away your home, consult your elder law attorney, who can advise you on the best method for passing on your home

Potential Property Tax Surprises for the Middle Class

As we can plainly see, if you’re not extremely wealthy you don’t face the same severe real estate tax burden that high net worth families face when gifting property to offspring. However, the tax man just doesn’t quit there. If you leave your home as part of your entire estate to your children, the property’s “tax basis” would be stepped up, in other words the “basis” would be the actual current value of your inherited property. 

Moreover – if the house remains in the estate, it will most likely will impose a significant estate tax burden on you, unless you take advantage of some other options, such as using an irrevocable trust loan in tandem with Proposition 19, to lock down a low Proposition 13 protected property tax base.

On top of these sort of tax consequences, middle class and even upper middle class homeowners are generally stunned when they discover that  gifting a home to heirs can also affect their eligibility, when becoming elderly, for Medicaid “long-term care” coverage. What many senior Californians call “a sneak  attack”.

Options to Help Your Children Avoid Property Tax Reassessment

Fortunately, there are some attractive options that you, as a home-owning parent, can turn to – prior to giving your children a house… such as (a) placing the house into a trust; (b) speaking with your children about how loans to irrevocable trusts work in their favor  when used in conjunction with Proposition 19 to buyout property shares from siblings – in other words keeping the home at a low property tax base with an irrevocable trust loan from a trust lender     whose expertise includes taking complete  advantage of California Proposition 19 parent-to-child property tax transfer on an inherited home as another option to turn to when you’re gone; or (c) simply selling your home  to your kids at an incredibly low price.

So before you decide to gift, or give away, your home – definitely consult with an estate lawyer, or an elder law attorney… who can advise you correctly on the best next-steps for transferring property over to an heir or several beneficiaries. Your children may very well turn to an irrevocable trust loan down the road, and this could save them from a severe tax burden that they may not even be aware of at this stage.

Naturally, if you have several children and some wish to buyout other siblings who decide to sell their shares, then your children who want to retain your property may wish to enlist the help of a trust lender as well as an attorney, to get an irrevocable trust loan to buy those siblings out while keeping the home at a low property tax base, given that your home is your primary residence, which is most likely is. 

Getting the Most Out Of Prop 13 and Prop 19 Property Tax Breaks

Getting the Most Out Of Prop 13 and Prop 19 Property Tax Breaks

Getting the Most Out Of Prop 13 and Prop 19 Property Tax Breaks

Residents in California that Benefit from Proposition 19

Focusing on senior residents and of course wildfire victims in the promotion of Proposition 19 was an extremely clever move by the CA Legislature. The state has been in the midst of another catastrophic series of natural fire storms  at the same time that voters were being introduced to the Proposition 19 tax measure; and voters certainly were personalizing what it might feel like to lose their home, in a matter of minutes, to fire… and of course this connection did not go unnoticed by the folks promoting Prop 19.  

Proposition 19’s backers ran sentimental, heart-tugging ads and even poured cash into the firefighter’s union.  Nonetheless, Proposition 19 only just passed with a little over half of the vote, 51%.
 
Prop 19 is a positive financial opportunity for seniors, victims of natural disasters and fire storms, and for homeowners with disabilities; or residents that happen to be grandparents that are looking to relocate from one area to another in California, to purchase a house nearer their family, specifically their children. And it’s a positive opportunity for older married couples looking to downsize, or to upgrade to a retirement home. 

On the other hand, it is a challenge for many middle class families, that are trying to avoid property tax reassessment; that are keen on establishing a low property tax base; to take advantage of Proposition 13 transfer of property, that wish to transfer parents property taxes when inheriting property taxes. It’s important to most families when inheriting property taxes from a parent, to keep parents property taxes, on any property tax transfer with a parent to child transfer or parent to child exclusion. 

Moreover, beneficiaries looking to buyout co-beneficiaries, siblings, are always looking for help in the transfer of property between siblings, to make sure nothing goes wrong — that you can keep your parent’s low Proposition 13 tax base and properly establish a low property tax base when buying out a siblings’ share of a house.

Easy Mistakes to Make, and to Avoid, with Proposition 13 & Prop 19

A few mistakes single homeowners, beneficiaries and property owning families  can fall into quite easily:

1) Some families forget to execute a property LLC in order to protect their  property from property tax reassessment when they pass away.

2) Some heirs or beneficiaries are not aware that they must file a claim for a “reassessment exclusion” or “exemption” under Proposition 13 inside of three years after the passing of a decedent, and therefore may lose their exclusion from property reassessment.  This can be an extremely expensive mistake.

3) Some homeowners mistakenly believe that they are passing on a “principal residence” or “primary residence”  but in fact have not resided full time in that home for many years.  This will cause expensive reassessment issues for any beneficiaries.

4) Some families believe they can pass on an exclusion from reassessment regarding a multi-unit residential property, even though they only reside in part  of the property.  This will cause serious issues for any beneficiary or heir.  

5) Some heirs or beneficiaries may not understand that they must reside in an inherited property only as a primary residence, under Proposition 19, in order to take advantage of a “parent-to-child” exclusion from reassessment, establishing a low property tax base; once a parent passes away.  Non primary residence could trigger reassessment at current market rates.

6) Some families revise the title of their home without consulting their tax lawyer or property tax specialist, possibly triggering property tax reassessment.

7) Some families will include numerous beneficiaries in a living trust, along with  listing their home.  If some of the beneficiaries are not offspring and some are, your actual children, i.e., heirs, may lose their ability to avoid property tax reassessment.

8) Some families may shift an industrial facility they have inherited into an LLC for business purposes, while renting it out; triggering a property tax reassessment by not  filing the proper forms in a timely fashion.

9) A property transfer may occur without proper registration paperwork filed   with the state.  Twenty years later the new property owner may owe twenty years worth of back property taxes at vastly increased rates. This can be a devastating event, causing the current owner to lose their home.

These laws are complicated and different scenarios can be confusing. Mistakes with paperwork or filing procedure errors can trigger reassessment at current market rates; even resulting in the loss of a home.  Another reason why estate lawyers have become so important as of late!