Common Mistakes to Avoid When Transferring a Property Tax Base

Transferring Property Taxes in California

Transferring Property Taxes in California

The Right Advice & Tax Plan from a Trust Lender 

Much to the relief of Californians who own property and/or are in the process of inheriting a home from a parent, for example, in any of the 58 county across the state, the parent-to-child exclusion from property tax reassessment is still alive and well in all 58 counties, in 2022.

However, quite often, new homeowners and beneficiaries trigger a property tax hike strictly by accident, and end up facing thousands upon thousands of dollars in property taxes from property tax reassessment – that could and should have been avoided, had the right advice and tax plan been in focus.

High property values in California highlight the need for careful property tax planning. If you have owned your property for many years Generally, in terms of property taxes, homeowners who have owned their home for a long time typically have a lower assessed value than current or “fair market” property value tends to be.

Parent-to-Child Exclusion

As far as parent to child transfers are concerned, when one beneficiary who is inheriting a home decides to buyout property shares inherited by co-beneficiaries (siblings) – to have complete ownership of said property – it’s easy to misstep and mistakenly trigger property tax reassessment.

A parent to child property tax transfer in is line with the effort to  avoid property tax reassessment under Proposition 19’s parent-child exclusion, retaining a parent’s Proposition 13 low property tax base. Therefore a loan to an irrevocable trust working in conjunction with Proposition 19 allows us to transfer property between siblings – buying out property from siblings.

Likewise, beneficiaries, upon inheriting property from parents, still have a property tax transfer at their disposal to transfer parents property taxes and keep parents property taxes when inheriting a parental home, and thus inheriting property taxes, but at a low  base rate.  Hence, the use of a parent-child transfer… enabling the use of the invaluable parent-to-child exclusion – bottom line, helping us avoid any possibility of triggering property tax reassessment! 

Choosing the Right  Trust Lender, to Keep a Low Property Tax  Base While Buying Out Inherited Property From Siblings

We prefer a trust lender who can formulate and deliver the more reliable, simple Proposition 19 rules & regs, in conjunction with an irrevocable trust loan to equalize beneficiary buyouts of inherited property shares.

We have found that any type of unconventional property financing other than irrevocable trust loan funding may run into unpleasant surprises such as property tax reassessment – due to an abrupt change in control, or revised ownership!

LLCs, Corporations, or various Partnership entities owning real estate are subject to a myriad of property tax rules & regs that can change on a dime, often disqualifying beneficiaries from taking full advantage of the parent-to-child exclusion, to maintain a low property tax base, and perhaps buying out inherited property shares from co-beneficiaries – avoiding property tax reassessment and running headlong into pricey financial surprises.

Transferring Your Base Year Value Under Proposition 19

Given new changes to Proposition 19, if you happen to be over age 55, or are severely disabled, you may be able to transfer your home’s current base year value to the purchase of a different home, thereby keeping your property tax payments low. To qualify, you must acquire your new home through a sale transaction. If you acquire any portion of the new property by gift or inheritance, you will not be able to transfer your base year value.

A Solution For Common Inheritance Disagreements

A Solution For Common Inheritance Disagreements

A Solution For Common Inheritance Disagreements

Many of us who work with estates, heirs and beneficiaries; supplying members of estates with various financial services, loans or cash advance services mainly — frequently see a large number of estates with family problems, typically surfacing in the form of one or more heirs attempting to get more than their fair share of inherited assets, in any number of various illicit or unethical ways.

We see co-heirs insisting they should be receiving a higher percentage of inherited property, or more from a cash account than was apparently written into the will.  We frequently identify conspiracies within estates experiencing problem like this; often between brothers, to illicitly remove inherited assets from another heir, often a vulnerable, formerly trusting sister, more often than we’d like to see.

We often see siblings hiring their own lawyers to ward off siblings that are attempting to receive a larger amount of inherited assets than their fair share.  A pricey but necessary expense. In short, this is a rarely reported problem of inheritance pilfering that, if successful, can cost victimized beneficiaries or heirs a great deal.

We can assume these situations reflect families that tend to not get along very well, and yet you hear time and time again that these siblings got along very well until a parent passes away and inheritance cash became an issue. 

Beneficiaries waiting for an inheritance often claim they got along well with their siblings until a cash inheritance materialized, and then squabbling began and grew into a genuinely heated conflict; with heirs blatantly attempting to help themselves to inherited assets reportedly belonging to other heirs.

This is where a popular solution to estate problems between siblings is introduced — to simply buyout problematic siblings, for  far more than an ordinary buyer would be likely to offer.  As most of us know by now, this involves a loan to an irrevocable trust from a trust lender; used in concert with Proposition 19, formerly with Proposition 58. 

This often initiated by one heir who wishes to keep their parent’s home in the family, while buying out property shares being inherited by frequently unwanted co-beneficiaries with a large  loan to an irrevocable trust… Heirs looking to keep their parents property generally try to get in under the wire, or seek legal counsel, to take advantage of property tax transfer, their right to transfer parents property taxes, and keep parents property taxes.  Inheriting property taxes through a parent to child property tax transfer child transfer and parent-child exclusion, to avoid property tax reassessment.

This process generally involves a fairly large 6-figure to 7-figure loan to an irrevocable trust, in conjunction with a parent-to-child exclusion (from property tax reassessment at current or fair market rates) – providing enough cash to create an equal trust distribution to all beneficiaries being bought out.

Does a Change in Ownership Affect CA Property Taxes?

California Change in Property Ownership

California Change in Property Ownership

Californians who make it their business to know – now understand that triggering property tax reassessment to “a new Base Year Value” as a result of new construction to a home, or a complete change in ownership – which makes it virtually impossible to establish  a low property tax base; and results in a yearly tax rate that increases abruptly to  current or “fair market” rates.

Translation in everyday language – you pay much higher property taxes every year. For example, the different between $600 per year and $9,000 per year. Significantly higher property taxes.

Every County Tax Assessor in California, in all fifty-eight counties, records and reviews every single property deed in every county, to figure out which homes and various other real properties require reappraisal, and which do not. The Tax Assessors also determine ownership changes with other investigative tools such as such as kept records from homeowner self-reporting, or from records of building permits; from newspaper files; or field inspections.

When a County Tax Assessor has determined that a property has changed ownership, Proposition 13 stipulates that the County Tax Assessor must reassess that property to its current (i.e., fair market) tax rate, as per the date of change of ownership.

Because property taxes in California are based on a property’s assessed value – at the time of acquisition – the property taxes will be increased if the current market rate is higher than the original assessed Prop 13 base year value adjustment. Therefore – if the current market tax rate is lesser than the previous adjusted base year value assessment, then taxes on that property will go down. Which is what everyone wants.

It is important to note, however, that a portion of ownership of that property may be reappraised. Let’s say that 50% of a home is transferred under Proposition 13, and the changes that the Tax Assessor is going to reassess is 50% of the home at the current market rate, as per the transfer date, so 50% will be deducted from the base year value, under Proposition 13 property tax relief… 

Typically, when someone buys a home, the home goes through a “change in ownership” and 100% of the home is reassessed at full current market value.   Even if the outcome of transferring real estate is a change in ownership, there are a number of exclusions from paying current tax rates – and so certain homes or other real estate will often not be be reappraised under these sorts of home transfers.

If a property owner files the proper claim, an exclusion from paying updated current property taxes will kick in as long the owner’s property, or portions of this property, are correctly excluded from reassessment.

The best way to cover changes in ownership that are excluded from automatic reassessment, or reassessment by claim; is to enlist the help of a tax attorney, a property tax consultant, or a trust lender who specializes in establishing a low property tax base for heirs upon inheriting a home from a parent.

Frequently, this will assist beneficiaries in buying out inherited property shares from co-beneficiaries through a loan to an irrevocable trust, which realtors and property tax specialists call a transfer of property between siblings or a sibling-to-sibling property transfer – working in conjunction with a California Proposition 19  parent to child property tax transfer on an inherited home – a parent-to-child exclusion (from property tax reassessment at full, current market rates), to establish a low property tax base.  

Naturally, this line of property tax relief, based on a parent’s property  also includes the ability to transfer property taxes when inheriting property taxes from a parent. Under these tax breaks, a property tax transfer like this can help heirs keep parents’ property taxes basically forever, based on a parent-child transfer; or a parent to child exclusion from reassessment – to legally avoid property tax reassessment.

You can always consult your Tax Assessor, however it is generally in the Tax Assessor’s best interest to charge you the maximum amount possible. A property tax consultant or trust lender, on the other hand, is motivated to save you money on taxes, not see you spend more.

Property Tax Relief 2021 Forward

California Property Taxes

California Property Taxes

It would be worthwhile, for once, to provide interested property owners with a breakdown of little-known details on the property  tax relief system in California. The California Legislature has implemented numerous property tax relief measures that many residents know very little or nothing at all about, such as a CA parent-child transfer for example. Furthermore, some of these programs are complicated, with voluminous forms to fill out — which is why consulting with a tax attorney, a property tax specialist or trust lender is crucial, when inheriting a home in CA or moving from one home to another. 

However – despite mixed feelings from property owners, that is what the County Assessor’s office is for,  besides happily taking your cash – to assist with difficult, complex issues. Unless you have deep pockets and can get all of your tax questions answered by a pricey tax attorney… which most middle class residents are not in a position to do. 

For example, claims have to be filed with the County Assessor for any new construction, to ensure this will be excluded from property tax reassessment – if it concerns modification of any existing structures, for instance to make sure a certain structure is more easily accessed by anyone who is physically disabled or impaired in any way.

Disaster Relief Protections & Exclusions

Properties that have been substantially damaged or destroyed by a so-called “natural disaster” such as wildfire, a massive flood or an earthquake can be reassessed to determine if the damage has reduced the value of the property. If the county where such a property is located has a “disaster relief ordinance”. Written claims for this type of relief has to be filed with a County Assessor inside the time-frame allotted in the ordinance paperwork – or within 12-months from the date the property was damaged or destroyed (whichever is later).

The reduced value of a damaged property like that remains reduced until the property is completely restored. At that point, the factored base year value can be restored – as long as it’s similar to the way the property looked before it was damaged. If a county has no disaster relief ordinance, a taxpaying resident can ask the County Assessor for a “Proposition 8 reduction in value”. But only if the natural disaster occurred in an area validated by the Governor as an area in a state of emergency and the resident decides not to restore the damaged property. 

The taxable value of damaged or destroyed property can be transferred to a reasonably comparable replacement property that is in the same county and was purchased constructed within 5-years after the natural disaster. The County Assessor will accept claims for this exclusion. 

Replacement Residence Transfers

The taxable value of a principal residence that is genuinely damaged or destroyed can be transferred to a “replacement residence” in another county, as long as the alternative residence is in a county that has an ordinance permitting taxable value transfers like this.

Los Angeles County, Orange County, San Diego, San Francisco, Santa Clara, Contra Costa, Modoc, Solano, Sonoma, Sutter, and Ventura Counties have all signed onto ordinances that accept transfers of base year value. And naturally, all County Assessors accept claims for this type of exclusion.

Parent-Child and Grandparent-Grandchild Exclusion

The purchase or transfer of a principal residence and the first $1 million of other real property between parents and children is not subject to reassessment.  Under the CA parent-to-child exclusion, to avoid property tax reassessment, CA parent-child transfer allows for a full year to move into a home inherited from a parent, as long as it is a primary residence, and the parent had used it as a principle residence as well – enabling  a beneficiary to transfer parents property taxes on a standard property tax transfer when inheriting property taxes.

At least one beneficiary can keep parents property taxes, as well as being able to buyout a sibling’s share of inherited property on a transfer of property between siblings, in concert with a Proposition 19 enabled CA parent-child transfer and an irrevocable trust loan for homeowners and beneficiaries inheriting property in California

The CA parent-child transfer and exclusion also applies to property  transfers from grandparents to grandchildren when both qualifying parents are deceased, subject to certain limitations. As usual, claims for this exclusion have to  be filed within a certain time-frame.

Eminent Domain Exclusion
 
Eminent Domain is the right of a government to expropriate private property for public use, with compensation. The taxable value of property may be transferred to a comparable replacement property if the person acquiring the real property has been displaced from property by eminent domain proceedings.

This is basically an acquisition by a public entity, or by some sort of pointed government action that resulted in an adverse legal judgment of some kind. The replacement property does not have to be located in the same county as the property that was taken; or as it’s referred to in polite company, as “removed”.  Claims for this exclusion has to be filed with the County Assessor within four years of the displacement.

Property Tax Exclusion for Residents Age 55+ or Disabled 

People over the age of 55 or who are severely and permanently disabled can transfer the taxable value of their principal residence to a replacement property if it is of equal or lesser value, located within the same county, and purchased or newly constructed within two years of the sale of the original residence. This type of unique  property tax relief can be utilized only once in a lifetime.

There is one exception to this one-time-only limit. If a candidate for this exception proves to be permanently disabled, after transferring the taxable value, and is under age 55, he or she can transfer the taxable value a second time under the disability requirement if the move is directly related to the disability.

Lastly, the taxable value can be transferred to a replacement property located in the same county, or to a replacement property in another county – as long as that property is in a county that has an ordinance that allows transfers like this. Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura Counties all have ordinances that allow transfers under this program. 

However, claims have to be  filed with the County Assessor inside of three years after the purchase of the replacement property, or after the completion of construction of the replacement property.  It’s critical to pay attention to this deadline.

Solar Exclusions

The construction or addition of a solar energy system (with the exception of a solar swimming pool heater or hot tub heater) is excluded from being viewed as “new construction”, and cannot be charged property tax until the property changes ownership.

What is Proposition 13?

What is Proposition 13?

What is Proposition 13?

Proposition 13 (i.e., People’s Initiative to Limit Property Taxation) is an amendment to the California Constitution, and was passed by voters in California on June 6, 1978 by close to two-thirds of the voting public. Proposition 13 was designed to decrease property taxes on homes, businesses, and farms by 57% – preventing property tax rates from exceeding 1% of a property’s market value. Property tax reassessment would no longer be able to increase by more than 2% per year, except when a property was sold to a valid buyer.

Boiling Point for the Middle Class & the Elderly

Before the advent of 1978’s Proposition 13, property taxes were notorious in terms of being completely out of control in California, in  all 58 counties. Reports and complaints of, for want of a better term, taxation abuse – were mounting.  Homeowners, especially elderly residents, were losing their homes due to the simple fact that they were unable to pay their rising property taxes. And yet state and local government officials did absolutely nothing to help.

Stories swept across the state like wildfire describing how senior retirees, military veterans, and elderly widows all living on modest fixed incomes were literally being thrown onto the street for late payments; or simply being unable to pay off increasingly high property tax hikes.

By the late 1970s,  property tax burdens were unbearable in the state of California; and just as important – unsustainable for working families, middle class, and even upper middle class homeowners. Obviously, wealthy and ultra wealthy residents could absorb pretty much any tax hike. But that’s merely 1%  or 2% of the entire state.

For elderly middle class folks dependent on fixed incomes, the outcome in the 1970s was frequently a forced sale of their beloved family home – typically the only asset of any real value they owned. And that was what Californians saw month after month, year after year – retirees and middle class working families either selling off their home, their most precious asset, or giving it up to the tax man against their will.

There was even a story circulating around of an elderly woman having a heart attack due to stress while visiting the Los Angeles Tax Assessor’s office, when she couldn’t convince the authorities to take her seriously and lower her tax bill…

Another good example of the state’s inflexible, intractable position on property taxes is a story from the 1920’s concerning a retired couple, as reported in the Newhall Signal newspaper in Newhall, CA. Because this elderly married couple lived in a small home, close to an upscale brand new apartment building, the County Tax Assessor decided to reassess the couple’s tiny house at the highest possible tax rate – as if the land their little home was on would soon boast a massive high-end hotel!  Their small home was taxed at $1,800 per year, regardless of the fact that the retired couple’s total fixed income was $1,900 per year.

Hence, support for Proposition 13 swept the state and filled local newspapers with headlines and reports on this urgent statewide  phenomena. Californians began thinking seriously about what it actually might be like to not be financially crippled  every year by mounting property taxes. 

The Howard Jarvis Taxpayer’s Association Viewpoint

The Howard Jarvis Taxpayer’s Association recently wrote: “The San Francisco Assessor was taking bribes to keep business taxes down below the market value. He went to jail. To make sure the valuations were correct and equal in San Francisco, the new assessor used computers.  When a property sold in a neighborhood,  all the surrounding properties found new tax bills reflecting a new market value, resulting in great increases in taxes for everyone. Property taxes went up so quickly in San Francisco that bumper stickers soon appeared pleading: ‘Bring back the crooked assessor!’

The private sector of the economy fared beautifully in the aftermath of Proposition 13, but some people questioned whether this private sector success might not have come at the expense of the public sector. Opponents of the tax cuts voiced concerns that the tax reductions might have gone too far requiring excessive program cuts. Vital services, they said, would suffer, schools would have to close, and fire and police protection would no longer be adequate. Yet in spite of the precipitous fall of the state’s average tax rate, state and local revenues did not fall proportionately. The total general revenue for local governments fell only 1% in the year following Proposition 13.  By FY 1980 revenue had risen more than 10 % the FY 1978 level. The tax base expanded by more than enough to offset the reduction in tax rates.”

Tax Hikes No More

Basically, Proposition 13 managed to lower property taxes by assessing properties at their 1976 value, while capping annual increases at 2% – not allowing property reassessment of any new base year value – with the exception of the home being sold to a new owner… or on the completion of any new construction on the house. 

As of 1978, to everyone’s relief and delight, all residential and commercial real estate owned by an individual, a family, or a corporation was  impacted by new  Proposition 13 property tax    relief measures such as transferring property taxes in California, namely a parent to child property tax transfer or parent-child exclusion  for all types of property  owners – and protected property tax transfers and the right to transfer parents property taxes  when inheriting property and inheriting property taxes. 

Beneficiaries could keep parents property taxes basically forever, or as long as they resided in their inherited residence as a primary home. This was what everyone had been waiting for, and was desperately hoping for.  With added amendments later on, such as the wildly popular Proposition 58 in 1986, with all sorts of California beneficiaries getting trust loans to buyout property from siblings, while locking in a low Proposition 13 based property tax base.

Another lesser known component to this tax measure, that many families did not even take note of, was an important new step that required a two-thirds majority in both CA Legislative houses to implement any further increases of any state tax rates or revenue charged, which included highly sensitive income tax rates.

A two-thirds majority vote was also imposed on local elections affecting local governments who otherwise,  perhaps on a Friday evening  blitz when no one was looking, would happily increase some sort of special interest tax, before the other party could stop them. A two-thirds majority vote would prevent that from happening going forward.  So Proposition 13 wasn’t just about homeowners getting the right to transfer parents property taxes.

For the first time in the state of California, taxation was capped at a strict 2% rate.  For the first time property tax relief (in practice as opposed to lip service), was accessible for middle class, upper middle class and working families – with its’ foundation built on a “base year value” for property tax reassessment, with enforced limits to state property tax rates and limits to increases through arbitrary property reassessment.

California Base Year Values

CA Proposition 13 locked in three critical restraints for property tax reassessment: (a) All real estate now had non-negotiable iron-clad base year values; (b) restricted rates limited property reassessment to a 2% yearly increase; and (c) a property tax limit of 1% of the assessed value was imposed along with the right to transfer parents property taxes and the parent-child exclusion.

Once Proposition 13 passed, property assessments for 1978-1979 were required to be “rolled back” to 1975-1976 property values, establishing the first base year values in California. Properties that have not sold or undergone new construction since February 1975 are viewed as having a 1975 base year value.

Reliable Property Tax Expectations

Because of Proposition 13, for the first time, certainty in taxation lay in the hands of the taxpayer instead of the tax collector. Proposition 13 set up an acquisition value system that treats all homeowners alike in that they pay 1% of the market value established at the time of purchase; limiting increases to 2% per year – creating a an even playing field for all property owners.

FAQ: Property Tax Transfers & Taxes on Inherited Homes

Trust Loan Question and Answers

Trust Loan Question and Answers

California Proposition 19 Trust Loan Questions and Answers

If you are staying abreast of updates and news, concerning property tax relief in California, you are most likely aware that there is still some confusion among homeowners as far as where Proposition 58 leaves off and Proposition 19 picks up… with respect to tax breaks like the parent-child exclusion, low tax base issues, and all property tax benefits associated with property inherited from a parent.

We will attempt to dispel some of that homeowner confusion here today through  some well worn questions and answers among beneficiaries, estate & tax attorneys, property tax consultants and trust lenders in California.

Q: If we forgot to apply for the parent-to-child exclusion before Feb 16, 2021, can we still qualify for this exclusion anytime thereafter in 2021 to avoid property tax reassessment through Proposition 58 and Prop 193 for the grandparent-grandchild exclusion?

A: As long as the change in ownership of your property from your parent took place on or before Feb 15, 2021, the transfer will qualify for the exclusion under Proposition 58/193. The date of death is the same as the date of the change in ownership. However, bear in mind that your claim has to be filed with your County Assessor within 3 years of the date of transfer (or prior to transfer to a third party) or within six months of the date of notice of “supplemental” or “escape assessment”. So no, your actual claim did not have to be filed by Feb 16, 2021.

Q: Regarding Proposition 19, if I inherit my parent’s family home and move into it as a primary residence, do I have to reside in that house to take advantage of the parent-to-child exclusion? Can I move somewhere else?

A: Apparently at least one beneficiary has to reside full time in that family home in order to avoid property tax reassessment with the parent-child exclusion. Once that property is no longer your full time home it will be reassessed at current market rates.

Q: Property transfers were executed under Prop 58 prior to Prop 19 becoming law on Feb 16, 2021. Is it true that Proposition 58 can also apply to property transfers after Feb 15, 2021?

A: No, it is Proposition 19 that will apply to property transfers after Feb 16, 2021.

Q: How does Proposition 19 affect my inherited property that’s being held in an irrevocable trust?

A: First of all, the trust governs the property. For a home held in trust, tax law states that a change in ownership occurs when real property goes to anyone other than the trustor or the trustor’s spouse or “domestic partner” when a revocable trust becomes irrevocable, and cannot be revised. The date of the decedent’s passing is viewed as the date of change in ownership. Proposition 19 states that Prop 58 applies to transfers that were executed before Feb 15, 2021. Proposition 19 applies to transfers that occur after Feb 16, 2021.

Q: If a family home is given to three sibling beneficiaries as a gift, must all three siblings reside in this home as a primary residence in order to take advantage of the Prop 19 parent-to-child exclusion?

A: As long as at least one sibling inheriting this property continues to live in the home as a primary residence, or principal residence, the exclusion will remain active for that property, and that beneficiary.

Q: Does Proposition 19 apply to a property transfer of a rental home, as Proposition 58 did?

A: No, under Proposition 19 the parent-child exclusion from reassessment applies only to the transfer of a family home that remains the principal residence of the beneficiary that moved in and continues to live there.

Q: If the value of my inherited home is more than $1,000,000 exactly what are Proposition 19 rules and regulations concerning the parent-to-child exclusion?

A: Under Prop 19 it is the sum of the factored base year value plus $1,000,000. Should the assessed value exceed this limit, you can benefit from partial property tax reassessment, or partial property tax relief. The amount greater than the excluded amount would be added to the factored base year value.

Q: If my county Tax Assessor doesn’t know about the passing of my Dad before Feb 16, 2021, and becomes aware of his death 15 months later and so reassesses the property I inherited from my Dad on the date of my Dad’s passing… Is a parent-to-child transfer or  parent-to-child exclusion applied through Proposition 58 or Prop 19?

A: The law in effect today tells us that the date of death will apply. It has been made clear that Prop 58 applies to an inherited property transfer from a parent on or before Feb 15, 2021.  It’s important to remember that California Proposition 19 applies only to property transfers that go through after Feb 16, 2021.

Q: Now that Prop 58 parent-child exclusion has morphed into Prop 19 property tax breaks, how do I apply for the homeowners’ exemption or disabled veterans’ exemption within 12 months of the transfer to qualify for a parent-to-child exclusion and grandparent-to-grandchild property transfer exemption from fair market property tax rates, as dictated by Prop 19? Who can help me apply for homeowners’ exemption or or disabled veterans’ exemption in my county?

A: To keep it simple, a claim will have to be filed with your County Tax Assessor, who will be on the BOE list of all California Tax Assessors;  and who will inform you as to what forms to complete, to apply for the homeowners exemption or disabled veterans exemption.

Why Consulting With an Attorney, a Property Tax Specialist or Trust Lender is Crucial Now, When Inheriting a Home in California

Inheriting a Home in California

Inheriting a Home in California

When inheriting a home from parents, one should always have a reliable estate attorney, if we’re looking to transfer a parent’s property taxes or we’re inheriting assets in trust or in a standard estate or probate; with an experienced eye on all  proceedings, especially the process of “equalizing trust loan distribution among beneficiaries” if a trust loan is a part of the process – a phrase often used by property tax specialists, and frequently misunderstood by heirs and beneficiaries.

“Equalizing trust loan distribution” simply means that each heir or beneficiary / sibling intent on selling their shares of inherited property  left to them by a parent, will receive an equal amount of money… settling expenses when there is little or no cash in the trust. 

Paying off a debt that a parent or grandparent has on a home can impact beneficiaries looking to borrow, as well as lenders. Having a competent attorney who knows how to structure a trust so that beneficiaries looking to keep inherited property at their parent’s low property tax base can retain that family property… while making sure that co-beneficiaries intent on selling their inherited property get an equal share of cash from a loan to an irrevocable trust.

This is where an experienced trust lender comes into play, preferably a lender that provides trust funding with their own capital, which ensures that interest charged will be as low as possible. Not using expensive money from investors, lenders with their own capital are free to charge as little as they wish, in terms of fees. In fact, a trust lender like this is free to exercise extreme flexibility with underwriting, maintaining particularly reasonable terms and conditions; as well as being able to implement trust loan transactions quickly, in seven to ten days.

It’s always worthwhile to hear what an experienced property tax relief specialist, in this case property tax consultant Michael Wyatt at Michael Wyatt Consulting in Corona CA, has to say about working with an established trust lender that typically provides five and six figure irrevocable trust loans with their own private capital –

A private money lender that loans to irrevocable trusts, applies for and works in tandem with California Proposition 19… So all the beneficiaries [in the family] who are looking to sell their real property shares – for the purpose of facilitating “non pro-rata distribution”, in other words getting an equal share of the entire overall estate – however not necessarily of every asset.

If there is a family that goes to a conventional, pricey lender like Wells Fargo for instance – they will always require adult children, beneficiaries that want to sell an inherited property, to ‘go off-title’, and that always triggers present-day tax reassessment. And that spells an expensive 66.66% tax hike!

If the family in question uses the Commercial Loan Corp, a company 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. Their terms can be a lot more flexible than an institutional lender like Wells Fargo or Bank of America. Also, Commercial Loan Corp is self funded, and that’s basically why they can extend easier terms to clients.

Compliance for both commercial and residential property owners is far less strict. Commercial Loan Corp doesn’t charge any fees up-front, that’s another great benefit. Plus, they don’t require paying 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 that the borrower has to pay back the mortgage in full before the borrower can transfer the property to another person. There is none of that.

Having access to private capital, along with seasoned advice, and expertise from a property tax consultant and a trust lender on how to transfer a parent’s property taxes,  becomes even more crucial in an inheritance scenario when a family is looking to keep a family home for a long period of time. 

California Proposition 19, which was (voted into law in 1986) formerly California Proposition 58, can enable a parent-to-child home transfer of a “principal residence” to be excluded from property tax reassessment even if associated with a “change in ownership”.  Which could trigger reassessment of property taxes, often by accident, resulting in  property tax reassessment – if not for experienced guidance from a trust lender and, frequently, from a property tax consultant or tax attorney as well, guiding the trust loan process and  property tax transfer; working in concert with Proposition 19 and parent-to-child exclusion (from high current  market rates).

Advice from property tax transfer specialists like this generally includes guidance for beneficiaries and new home owners within the process of being able to transfer a parent’s property taxes, plus showing inheritors what they need to do to keep parents property taxes when inheriting property and subsequently inheriting property taxes from a parent.

Michael Wyatt Consulting may be contacted at (951) 264-6152 for questions on retaining a parent’s low property tax base; and how to transfer a parent’s property taxes, through CA Proposition 13; or with questions about getting a loan to a trust, in conjunction with CA Proposition 19.

 

Helpful Advisors During a Property Tax Transfer on an Inherited Home

California Property Tax Transfer

California Property Tax Transfer

Transferring A California Property Tax Base On An Inherited Home

If you’re a member of one of the many families who owns real property in California – it would be wise to understand how much Prop 13 and Proposition 19  can affect property tax reassessment, no matter where you live in the state. 

In fact, it’s never been more important than now to understand how profoundly these property tax relief measures can impact your life – plus how important it is to do everything correctly when dealing with property tax breaks like Proposition 19 and Proposition 13.

Number One Strategy: Avoid Making Mistakes!

For whatever reason, a fair amount of residents do not fully understand how these tax breaks work, and how to make them work.  The problem is, families often trigger reassessment of their property taxes by accident, due to a variety of reasons – refusing to hire an estate attorney simply to save money; faulty data; or mistakes filing information; missing document deadlines… so on and so forth.

Consequently, what can be lost can be significant… such as the ability to avoid property tax reassessment, to miss out on property tax breaks such as parent-child transfer and the parent-to-child exclusion; the right to transfer parents property taxes, to keep parents property taxes after a CA property tax transfer, when inheriting property taxes.

It’s not difficult to mishandle a transfer of property when inheriting a home, or mishandle the drafting of a trust in such a way that expectations towards a cap on property taxes are disappointed. Of course, these types of errors and subsequent property tax  reassessment brings great happiness to the parties responsible for collecting property taxes all over California.

Families that are concerned with making sure these processes go smoothly generally enlist advice and/or the services of a real estate law firm or estate attorney such as Rachelle Lee-Warner, Esq. at Cunningham Legal, or a property tax consultant like Michael Wyatt Consulting, or perhaps a Trust Lender such as Commercial Loan Corp.

Proposition 19 and Revisions to California Property Tax Relief

It is difficult to avoid the fact that property tax breaks in California have been impacted, one way or the other, by Proposition 19; which was voted into law Nov 2020, becoming active on Feb. 16, 2021.

Under Proposition 19, a parent can transfer their primary residence and low property tax base to their children (i.e., heirs) — allowing  offspring to move into an inherited home rather quickly, within 12-months, as a principle residence.  Although, if the home is valued at more than $1,000,000 it may be reassessed, with an impact on the parent-to-child exclusion from current tax rates.  On the other hand, if you’re over 55, physically impaired, or a victim in some way of the frequent wildfires California has been experiencing, or some other natural disaster such as a flood or earthquake — you can be a recipient of numerous property tax breaks on top of CA property tax transfer (discussed in detail elsewhere within this Blog).

However, beneficiaries of parental property have other options, such as working with a trust lender such as Commercial Loan Corp, for example, in addition to having expertise in CA property tax transfer,  the ability to provide funding to an irrevocable trust, in order to buyout co-beneficiaries looking to sell off their inherited property shares, as well as establishing a permanently low property tax base. If you think you may benefit from a Proposition 19 property tax transfer on an inherited home, you can reach Commercial Loan Corporation at 877-464-1066 for a free benefit analysis.

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.

Propositions 58 & Proposition 19 Trust Loan

Proposition 19 Trust Loans How To Keep a Parents Low Property Tax Base On An Inherited Home In California

Proposition 19 Trust Loans
How To Keep a Parents Low Property Tax Base On An Inherited Home In California

Trust Loans: Keeping a Low Property Tax Base

California trust loans are commonly used to establish a low property tax base for beneficiaries inheriting a parent’s home, working in conjunction with California tax break Proposition 58 and California Proposition 19. 

This process, often involving a loan to an irrevocable trust, also sometimes resolves inherited property conflicts between siblings by providing needed cash for a trust distribution. In case you didn’t know, after Feb 2021 the popular Proposition 58 parent to child exclusion (from property tax reassessment at high, current market tax rates) is now essentially the Proposition 19 parent to child exclusion. It has basically morphed into the new  Proposition 19 property tax measure – yet still enabling most  beneficiaries to buyout their co-beneficiaries’ shares of inherited property and avoiding property tax reassessment for themselves, retaining a parents low property tax base going forward.

In other words, it’s still possible to buyout  a siblings portion of an inherited home and keep a parents low property tax base using California Proposition 19.  The process is sometimes refer to as “a transfer of property between siblings” or “sibling to sibling property transfer” – funded by an irrevocable trust loan – from a trust lender specializing in the trust loan and CA Proposition 58, Prop 19, and Prop 13, process. 

Moreover, it’s still possible, thankfully, to transfer parents property taxes when inheriting property.  The ability to continue inheriting property taxes, to keep parents property taxes basically forever on any property tax transfer through the parent to child transfer and parent-child exclusion, is still intact and protected by Proposition 13 and to a more limited degree by Proposition 58  and now Proposition 19.  Exactly for how long, we’re not sure — which is why voters must keep a close watch on critics of property tax relief in California, on the realtor community, and on the CA Legislature.

If you are interested in taking advantage of your California Proposition 19 property tax benefit and avoiding property tax reassessment on an inherited home, we suggest calling Commercial Loan Corporation at 877-756-4454 when a third party loan might be needed to provide the funds needed to equalize a trust distribution and buyout siblings. You may also complete the online California Proposition 19 Parent to Child information request form located here.

When a child is inheriting a home from a parent and would like to use Prop 58, or Prop 19 to keep a parents low property tax base it is still entirely possible to do so!  You may be inheriting a home from a parent, in trust, yet if there are not sufficient cash assets in the trust to make an equal distribution, then a loan against real estate in the trust will be needed to qualify for the parent to child transfer to avoid property tax reassessment – and this can still easily be done, with the right property consultant or trust lender, such as Commercial Loan Corp in Newport Beach, CA or Michael Wyatt Consulting in Corona, CA; despite some imposed limitations from California Proposition 19.