PART ONE: The History of Property Taxes in California

The History of Property Taxes in California

The History of Property Taxes in California

Property Taxes Before and After World War Two

California no longer depended on property taxes as its’ principal funding source after 1912.  And after 1929, during the depression years, there were massive amounts of unpaid property taxes. In fact, some states excluded certain owner-occupied homes from property taxes altogether. Many taxpayers avoided purchasing tax delinquent homes and properties, and governments in some states enforced limits on property tax rates.

These so-called “homestead exemptions” became rather unpopular with the public at large as they tended to be wealthy homeowners,  with what was perceived as unfair property tax relief, and apparently reduced revenue to local governments that depended largely on property taxes from homes rather than other forms of real property.

During World War Two, state and local taxes were stabilized, or decreased, as spending programs were cut back due to decreased needs, or unavailability of building materials and other resources. This was reversed in the post-war years, after 1945,  as governments expanded social programs and took advantage of rising property value to increase tax collections.  Assessment rose, tax rates rose, and the newspapers ran stories of homeowners forced to sell their house mainly because of rising taxes. No one was keeping a low property tax base from parents when inheriting a home.

Once Germany and Japan surrendered to the Allies in 1945, and World War Two ended… most states replaced the “homestead exemption” with so-called “circuit breakers” which were state financed and clearly benefited blue-collar and middle class homeowners, senior and elderly homeowners, and disabled persons. In many states renters were included by tax measures that actually viewed certain rental payments as property taxes. (By 1991 there were 35 states with some sort of “circuit breaker” exemption in place). 

California Tax Revenue

Property taxes have now created a revenue stream for the state of California that funds changing needs of cities and counties, school systems, and what is referred to as “special districts”.

California’s primary source of state funding is now a combination of sales tax, income tax, excise tax, as well as banking and corporate taxes, and “use tax”, which is a sales tax on purchases made outside one’s state of residence for taxable items that will be used, stored or consumed in one’s state of residence and on which no tax was collected in the state of purchase.

California Property Taxes in the 1960s

During the early 1960s in California there were various scandals involving County Tax Assessors. These particular Property Tax Assessors were caught gifting personal friends and political associates with abnormally low property tax assessments, and unnaturally low tax bills.  Not at all like keeping a low property tax base upon inheriting property from mom or dad in 2021!

The Tax Assessor scandals brought about Assembly Bill 80 in 1966, which imposed standards to hold assessments to market value. The return to market value in the wake of AB 80 could easily represent a mid-double-digit percentage increase in assessment for many homeowners.

A huge number of homeowners in California were impacted with a significant increase in property valuation and tax rates, only to discover that this tax revenue was to be distributed to communities far away from where they resided.

California Property Taxes in the 1970s

This type of activity, distributing tax revenue to distant communities  created a widespread pessimistic attitude among middle class and blue collar homeowners towards the tax system in general, and it’s reportedly biased view towards wealthy, well-connected families.

This viewpoint grew throughout the state until the 1970s, when it morphed into a tidal wave backlash of anger against the existing property tax system. This gave apt. building magnate Howard Jarvis and his Taxpayer’s Association great momentum towards expanding and popularizing property tax relief in all 58 counties in the great state of California.

California’s Famous Tax Revolt That Led to Proposition 13

Within a few years the country was awash with truly emotionalized tax protests, often referred to as “The California Tax Revolt”. Almost every state imposed some sort of limitation on 111 property taxes, coming to a head with the widely promoted Proposition 13 – an amendment to the California constitution, passed by popular vote in California on June 6th, 1978, with nearly 2/3 of Californians voting for Proposition 13, reducing property taxes by 57% – establishing this to be the most effective assault on property taxes in American history.

The Proposition 13 amendment limited property taxes to 1% of full cash value; requiring real property to be valued at its March 1, 1975 value – or on the date it changes hands or is constructed after that date; limiting subsequent value adjustment to 2 % per year or the rate of inflation, whichever is lower.  This prohibited the sales impact or “transaction taxes” on the sale of real estate; and required a 2/3 majority vote in each house of the legislature to increase state taxes;  plus a 2/3 electorate vote to increase or add new local taxes.

Although Proposition 13 was the most well known initiative to limit property taxes, along with transferring property taxes from parent to child on a property tax transfer  from a parent.  Inheriting property taxes can offer a great upside, when an heir is able to keep parents property taxes. And of course have the ability to work with a trust lender when taking advantage of property tax relief from Proposition 13 and Proposition 19 (formerly Prop 58) and it’s flagship tax break, the parent-to-child exclusion, to avoid property tax reassessment and keeping a low property tax base when inheriting a home, as well as being able to buyout property shares from co-beneficiaries, typically siblings, with a  loan to an irrevocable trust.

Proposition 13 and Proposition 19 make it possible to continue keeping a low property tax base when inheriting a home, however they are not the only property tax measures to limit and control property taxes. Some limit tax rates, or property tax maximums. Other tax measures provide specific groups with limited but significant tax breaks; with some property taxes designed to promote various forms of economic development in various urban or rural areas. Interestingly enough, these tax measures included provisions favoring agricultural land, reduced taxation of owner-occupied homes, exemptions that  benefit seniors, or veterans, or the disabled, the elderly, or the poor. 

Economic incentives built into some of these property tax laws included lower rates on particular businesses, exemptions covering people of a certain age, tax breaks in developmental areas, and more….

>> Click Here for Part Two…

 

Tax Basis Portability & New CA Property Tax Relief Benefits

Although a parent-child transfer exemption or exclusion, and related CA property tax relief benefits have no age restrictions — tax basis portability is available only to homeowners that are age 55 or older as of their home-sale date.  You are eligible if you are significantly disabled, or your home has been severely decimated or damaged by wildfire or a natural disaster.  Moreover, a replacement residence can be bought before the original home is sold.

Tax Basis Portability and Taxable Value

As of April 1, 2021 homeowners in California can now transfer the “taxable value” of their primary residence to a “replacement primary residence”.  Just as a parent-child transfer exemption is available in all counties; this too can happen anywhere within all 58 counties, in two years or less of the sale of the original property;  without any County restrictions as there were before Proposition 19 came about. This can be done up to 3 times, with no restrictions for homes that have been badly damaged or destroyed by wildfire, for instance the type of forest fire that we have seen lately destroying property throughout the state.

It’s not that complicated.  Say your home has an assessed value of $400,000 and you sell your home for $600,000 – and then purchase a new house for $550,000.  Rather than a new reassessed value of $550,000, you can apply to the Tax Assessor to have the value of your new home reset to the original $400,000 assessed value. This could save you roughly $1,800 every year in property taxes.

“Tax basis portability” in California is a way to lower the assessed value of your house. Hence , in plain English, your property taxes will go down.  Your property tax total for the year is usually a direct reflection of your home’s assessed value. And this impacts the sale price of course, if a home is being sold. When you own and reside in your home as a primary residence, your assessed value goes up at a maximum in California by only 2% every year. With tax basis portability, you can transfer the former assessed value of your home over to your next home.

New California Board of Equalization Clarification

The Board of Equalization has now clarified this question in May of 2021, and stipulated that there is no requirement for a homeowner to be the sole owner of an original primary residence or a replacement primary residence if he or she is age 55 or older, significantly or permanently disabled, or who is a victim of a wildfire.  Hereby adding more  flexibility to tax breaks that existed previously, along with a newly imposed right to take advantage if these particular tax breaks in any county in the state.

This was formerly not possible, and one was limited to a specific number of counties. These older rules limited the location of the properties. Proposition 60 restricted tax basis portability within one county. Proposition 90 expanded that to several counties, allowing you to sell property in one county and purchase property in another, but only if they were on the approved county list.  With the advent  of  Proposition 19, instead of limiting the counties of transfer, you can use this benefit anywhere in California — a major improvement.

Propositions 60 and 90 and 110 Expanded

Proposition 19 grants more freedom over the older Propositions 60, 90, and 110. There are no more county restrictions or sales pricing  restrictions, and people can use the benefit more than once.

Proposition 19 Removes Restrictions on Home Sales Pricing

Under Propositions 60 and 90, only transfers of “equal or lesser value” were eligible for tax basis portability. Proposition 19 allows the transfer of tax basis no matter what the value is. However, there needs to be  specific adjustments to the tax basis should the sale price of the replacement residence be more than the sale price of the previous residence.

Equal or Lesser Value

The tax basis can be transferred as long as the replacement residence is of equal or lesser value. There can even be an inflation index of 105% if purchased inside of 12-months, and 110% if bought  within the second year of the sale of the initial property.

Lower to Higher Value

Under Propositions 60 and 90, if the replacement residence had a higher market value, you weren’t eligible for the benefit. After the advent of Proposition 19 you are still eligible for tax relief.  If you sell your primary residence that is currently assessed at $300,000 for $500,000, and you buy a new house for $600,000 the increase in price of $100,000  also increases the assessed value of the first house…

So the math would look something like this: $300,000 plus $100,000 equals  $400,000 — the new assessed value. Therefore, rather than getting hit with property taxes that are based on $600,000 you pay a tax rate that is based on $400,000.  A significant difference.

Proposition 19 Benefits: Numerous and Expanded Uses 

Proposition 19 now allows up to three tax basis transfers during a lifetime,  even if you have transferred your tax basis in the past; and    for homeowners who have lost their primary residence in a wildfire there are no limitations. Even if you have already used Proposition 60 or Proposition 90 to avoid property tax reassessment it isn’t factored in to the three transfers you’re permitted with Proposition 19. 

Likewise, with Proposition 19, new homeowners or beneficiaries just inheriting a home from a parent  have up to a year to move in to their inherited home as a primary residence and can use a property tax transfer without any issues to avoid property tax reassessment when they transfer parents’ property taxes over to themselves, typically taking advantage of a parent-child transfer exemption — namely a parent-to-child exclusion, now being able to keep parents property taxes basically forever.

Inheriting property taxes under a parent-child transfer exemption and other, newer, rulings — although a little more limited than before — still ends up providing middle class beneficiaries in California with a low parent to child property tax transfer on an inherited home, plus an opportunity to buyout property shares from co-beneficiaries with a 6 or 7-figure trust loan working in concert with  Proposition 19 furnishing siblings with a good deal more buyout cash than any normal outside buyer would offer for the same property with a realtor and a bank involved, plus an inherited home can still remain in the family as a valuable financial and sentimental asset; affording working families lower taxes from genuine property tax relief.

What’s Good for California? Property Tax Revenue… or Property Tax Relief?

Property Taxes in California

Property Taxes in California

2021 forward, those in leadership roles in the state of California really should to get one thing straight. Middle class homeowners, working families, and even upper middle class property owners – which accounts for most of the state, frankly – do not need more property   tax hikes, and they do not need to be reaching deep into their pockets to be sending yet more tax revenue to the state; especially during a virulent pandemic, where middle class property owners are not getting any richer, nor (as the saying goes) are they getting any younger.
 
With so many people still furloughed, reduced to part-time work, or “temporarily” laid off… with more folks than you might think at 100% unemployed status… with a fair amount of companies shrinking their work force, with some even going completely out of business or leaving the state to set up shop in a nearby state where taxes are lower and property less expensive, plus lower overall cost of living. 

Therefore, with survival at the top of most peoples’ list, middle class families in California are not particularly interested in reading about all the billions going into the state coffers as a result of new property tax measures, in editorials and articles in local newspapers…

On the contrary, homeowners are far more interested in saving money through long-term, time tested California property tax breaks – often with information provided by seasoned property tax consultants like Michael Wyatt Consulting in Corona, and attorneys with decades of property tax relief expertise such as Rachelle Lee-Warner, Esq. at Cunningham Legal trust administration, estate-law firm in Auburn; or estate & trust lenders like Commercial Loan Corp in Newport Beach.

These firms help beneficiaries that are inheriting property from a parent save many  thousands of dollars every year by taking advantage of a (formerly Proposition 58) Prop 19 parent-child exclusion – working in conjunction with an irrevocable trust loan, making it possible to avoid property tax reassessment – buying out sibling property shares while keeping your inherited home at a low Proposition 13 tax base – buying out co-beneficiaries that are looking to sell off their inherited property shares for substantially more cash than an outside buyer would offer, which is the extra bonus. 

Firms like this will guide families through a Prop 19 parent-child exclusion and property tax transfer when inheriting property taxes, with the ability to transfer parents property taxes and keep parents property taxes through the parent-child transfer.

Every property owner and beneficiary should have reliable access to a firm that can lend money to an irrevocable trust – typically a trust loan lender.  Every  property owner in California should also have access to property tax appeals and property tax reduction, from boutique property tax relief companies. 

When we read local news or editorials, we’re encouraged to think about how wonderful all the extra property tax revenue is for California, and how helpful it is for local firemen and school boards, and how fortunate it is for realtors and well connected companies with special interest construction contracts.  Neither commercial property owners and homeowners don’t have the luxury of thinking about the state government’s terrific success at driving more tax revenue into the coffers from well disguised property tax hikes!

All property owners in California should have locked in rights to keep their yearly property taxes low, and when inheriting a home from parents and inheriting parents’ property taxes — to establish a low property tax base that will last literally forever. This is the most important safety net middle class and even upper middle class residents and beneficiaries have in the state of California… and should be focused specifically on taking advantage  that, not on the states’ fabulous increases in property tax revenue.

Popular Reasons Why California Beneficiaries Get a Trust Loan

California Trust Loans

California Trust Loans

Typically, beneficiaries who are seeking a mid to high six-figure or low seven-figure loan to an irrevocable trust are looking to accomplish an important outcome that is generally not possible with other types of financing such as inheritance advance assignments, credit union financing or personal bank loans – as reviewed below…

What Type of Trust Lender do You Want to Work With?

Families buying out sibling property shares while keeping your inherited home at a low Proposition 13 tax base typically enlist the help of an experienced California trust lender that is self-funded. Beneficiaries generally want a self-funded lender as they deliver funding at a faster rate than institutional lenders, such as five to seven days, versus three to four weeks. They also offer terms that are more flexible than an institutional lender such as Bank of America or Wells Fargo. Their compliance requirements for both commercial and residential property owners are also less restrictive than traditional lenders.

Self-funded trust lenders seldom charge up-front fees, they do not require borrowers to pay advance interest on their trust loan; and there is never a “due-on-sale” clause that requires the mortgage to be repaid in full when the property is sold. Lastly, beneficiaries like the fact that this type of firm does not impose an “alienation clause”… in the event of a property transfer, insisting that the borrower has to pay back the mortgage in full before the borrower can transfer the property to another person. Estate and trust attorneys, or property tax consultants will always advise beneficiary clients to avoid these types of restrictive and costly requirements.

Buying Out Property Shares Inherited By Co-Beneficiaries

Generally this option revolves around a common family or sibling conflict that typically has beneficiaries insisting on selling their inherited property shares, while other beneficiaries are looking to keep the family homes, and are enlisting the help of a trust lender to buyout siblings who are determined to sell.

This method of funding provides the beneficiaries looking to sell with a good deal more money than a realtor will get them, with more cash from a trust loan and trust lender than an outside buyer would come up with… Avoiding an expensive, standard 6% realtor commission, avoiding closing costs, legal costs, and processing fees.

This type of family conflict is stressful, however the trust loan process provides a win-win solution for all concerned – keeping property at a low base rate for those who are retaining their parent’s home, and putting a lot more cash in the pocket, as far as beneficiaries who are intent on selling their inherited property shares are concerned.  The trust lender funds the trust and provides “equalized distribution” so every sibling who is selling their shares receives an equal amount.

Avoiding Property Tax Reassessment

Beneficiaries looking to keep their inherited family home, while buying out siblings that are looking to sell off their inherited property shares with personal funds, will discover quickly enough that this is not a viable option. Siblings who wish to keep their family home must avoid triggering reassessment, hence using a loan to an irrevocable trust is the most beneficial option, keeping property at a low base rate, or walking off with a lot more cash from selling inherited property shares. Depending which side of the fence you’re on.

As a CA homeowner – how do you ensure, as with a parent-child transfer, that you’re not paying more property tax than you should?  New homeowners must take the right steps in the beginning to keep the low property tax base their parents had, avoiding property tax reassessment at high current rates.  Without trust loan funding, the transaction would be viewed as a “sibling-to-sibling transfer” and thus would not avoid property reassessment. 

A beneficiary keeping the inherited home winds up saving on average $6,200 in yearly property taxes.  Borrowing against an irrevocable trust ensures that the process moves directly through the estate and locks in a low property tax rate. Closely related property tax benefits – that beneficiaries and new homeowners need  to get extremely familiar with – stem from Proposition 13 as well as Proposition 58;  and have morphed rapidly into Proposition 19…  

This all begins with basic property tax transfer… meaning the ability to keep parents property taxes, keeping property at a low base rate through the parent-child transfer and parent-to-child exclusion.  Beneficiaries, and believe it or not their estate attorney, absolutely have to know all about their right to transfer parents property taxes when inheriting parents property and inheriting property taxes from Mom or Dad…

Paying Trust Expenses

For beneficiaries, when a trustee passes away, there is often not enough cash or “liquidity” in an estate or in a trust to pay debts an initial trustee owed, such as attorney fees, medical bills, mortgage and personal loan debt, and other financial obligations. A trust loan can help resolve these debts.

Renting or Selling Inherited Property

If heirs or beneficiaries decide they’d like to rent out an inherited property, there are often maintenance costs and repairs to be considered. Especially when dealing with an inherited homes, age is an issue… hence there are often roof issues, boiler problems, pipes to be replaces, and so on. Before one is able to put an older home on the market to rent or to sell.

Irrevocable trust loans and Proposition 19 property tax exclusion, working in conjunction with each other,  insures that beneficiaries and new homeowners can get these fairly complicated tasks  accomplished in a relatively easy, stress-free and inexpensive manner.

The Function of a CA County Assessors Office

The Role of the County Assessors Office

The Role of the County Assessors Office

The CA County Assessor’s Job

As we all know, property taxes in California are determined by the value of our property. Every county Tax Assessor has to identify and calculate the value of many different types of taxable property in all 58 counties in California, as well as deal with property tax appeal challenges, as they come into the Assessor’s office.

The Assessor has always been independently elected in California, and is supposed to be completely objective, working for the people (i.e., voters) in each Assessor’s county – to be able to avoid political or financial influence from any governing county body; to avoid coercion from any city, school or district to accelerate the number of county tax assessments in order to generate more property tax revenue.

Principle Tax Assessor Responsibilities

The Assessor is charged with making sure property owners in California are taxed at the appropriate rates; ensuring that county public services are receiving the funding they need to continue functioning. Tax Assessors have to locate real property, land, various taxable structures via maps, which reveal every known land parcel, along with an “assessment roll”, which details improvements on property as well as ownership. It’s worth noting that household furnishings, livestock for the most part, and business inventory are no longer considered “taxable property”.

Four critical duties Tax Assessors must address are:

1. Locating taxable property

2. Identifying the owners of all taxable real estate

3. Determining the assessed value of all taxable property

4. Publishing yearly assessment rolls, plus supplemental reporting

Locating Taxable Real Estate

The Assessor must locate real property, land, various taxable structures via maps, which reveal every known land parcel, along with an “assessment roll”, which details improvements on property as well as ownership. It’s worth noting that household furnishings, livestock for the most part, and business inventory are no longer considered “taxable property”.

Property Assessment:

Since 1978, California’s property tax system (under state constitution Article-13a), is typically referred to as Proposition 13; with an Amendment in 1986 adding Proposition 58 to the process which provided a parent-to-child exclusion, and allowed beneficiaries to buyout property shares inherited by co-Beneficiaries… abruptly replaced and somewhat altered in Feb of 2021 by Proposition 19; although still providing homeowners and beneficiaries with property tax relief from property tax transfer benefits avoiding property tax reassessment with the right to transfer  and keep parents property taxes when inheriting a home, and  thus inheriting parents’ property taxes with the help of a parent-child transfer, and parent-to-child exclusion from current, or “fair market value” tax property rates.

Proposition 13 evaluates real estate at the 1975 “fair market value”, including factoring in heirs inheriting parents property taxes; with yearly increases curtailed at a 2% or the inflation rate, as measured by the CA Consumer Price Index – or whichever is less.

Real property is reappraised by the Assessor for tax purposes only when there is a change in ownership; new construction on property has been completed; new construction has not been finished as of the “lien date” (Jan 1); or market value has dropped below Proposition 13 factored value on the lien date.

Reappraising Real Property in California

When any taxable property is reappraised due to change of ownership a Tax Appraiser will examine sales of similar properties. Or if the property happens to generate revenue, the Appraiser will execute “an income approach”. If the real property in question is original and unique the Appraiser could potentially use the amount of money, or budget, the property owner spent on construction – or perhaps research industry-wide studies on similar construction, and use those costs instead to base the appraisal on.

As soon as that property has been evaluated, the property owner will be contacted and notified of the new property reassessment, or evaluation, and will be given the opportunity to review and discuss with the Assessor. If the property owner happens to disagrees with the reassessment, the property owner can always apply for a property tax appeal or “revised assessment” with the local Board of Assessment Appeals.  Or enlist the help of a property tax appeal firm.

Property like boats or airplanes are assessed every year based on up-to-date Blue Book information distilled from market sales. Trade equipment is also assessed every year, using a formula based on original cost and age of the equipment.

If none of these items apply, the assessed value of a property can be increased by no more than 2% per year. Sale price of a property is considered be its’ market value unless the Assessor can prove convincingly that market value is not accurately reflected by the sale price. The Assessor is also expected to revise the sales price of a property to prove any value that can be attributable to items that are exchanged in a sale, not for cash; perhaps such as barter.

In many respects, Proposition 13 changed the rules in California – as explained by the County of Napa.org website, which tells us:

Prior to the passage of Proposition 13 in 1978, the Assessor reappraised all properties on a four-year cycle, with entire neighborhoods receiving increases in value based on recent sales in that area. Under Proposition 13, values are established at a base year, either as of March 1, 1975, or as of a change of ownership or new construction.

Proposition 13 requires an annual inflationary adjustment, not to exceed 2%. A property with a 1975 base-year value of $100,000 has a cumulative adjustment over the past 43 years of 211%, resulting in a current factored base year value of $211,000. Thus the function of the assessor has gone from doing mass appraisal impacting many properties to an individual appraisal of properties that have changed hands or had new construction.

Ownership records are maintained from documents obtained from the County Recorder. Assessor maps are updated as parcels are subdivided or their boundaries adjusted. Building permits are reviewed for accessible new construction and appraisers make discoveries in the field.

County Assessors Offices, Auditors, Auditor-Controllers, Clerks of the Board & Tax Collectors can found in all 58 counties across  the State of California: Here ~ on the BOE Website

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.

PART TWO: The Home Protection for Seniors, Severely Disabled, Families & Victims of Wildfire or Natural Disasters Act

Move Anywhere in California and Avoid Property Reassessment 

General consensus of California property tax experts who have been watching Proposition 19 even before it was voted into law on Nov 3, 2020 confirm that property owners age 55 or older who are “severely disabled” are eligible for special property tax relief benefits…

And, with all due respect, this is precisely one of those items that Californians in talk about as being a bit vague – in other words, what exactly constitutes a “severe” disability versus a disability that is perhaps “not so severe”. The California State Board of Equalization (BOE), who defines rules and regulations for Proposition 19, hasn’t yet fully determined certain fine-tuned details. 

However, even though trust loans in conjunction with Proposition 19 as well as trust lenders and the CA parent-child exclusion are not discussed in great detail, we still know with a great deal of certainty  that you can still receive a large loan to an irrevocable trust to  buyout a co-beneficiary’s inherited property shares, while at the same time keeping a family home at the parents’ low property tax base.  It doesn’t need to be discussed into the ground to know that these tax breaks are still alive and well, like many others.

The same applies to victims of a “wildfire”, such as we see throughout  California these days; or a “natural disaster” such as an earthquake or a flood.  Point being, how is one to determine how much damage from a natural disaster or wildfire is “sufficient damage” to qualify a homeowner over the age of 55 to be fully eligible for certain property tax relief benefits?

At any rate, one can move as many as three times statewide during a lifetime. This is an increase from the previous property tax law that allowed only one move. During this move, or these moves, one can transfer their lower property value to recently purchased property – moreover, this can done in any of the 58 counties statewide, whereas previously permitted counties were limited to pre-approved counties only.

Therefore if you are over 55, as far as property taxes are concerned, the world is yours, as it were.  This is somewhat ironic, as older Americans usually find themselves at the short end of the stick when it comes to age bias… Not any more, when it comes to real estate.

 Moving to a New Home, While Taking Advantage of Prop 13?

Prop 13 instituted a base-year value for property tax assessments and limitations on the tax rate and assessment increase for real property. While Prop 19 changed some of the 1978 property tax breaks protected by Prop 13, there are certain things you can do to retain its’ original intentions when moving to a new home in California – and make sure you are aware that:

a)  the purchase of your new home, or new home construction, occurs within two years of the sale of the prior property;

b)  your original property is reassessed when it’s sold;

c)  even though the goal is to avoid property tax reassessment on an inherited home – if the new property costs more than the old property, the difference will be reassessed.

d)  The BOE has stated formally:

The transfer of the base year value must be on or after April 1, 2021, and not the purchase or sale of either the original or replacement property. If the replacement primary residence is purchased or newly constructed on or after April 1, 2021, the primary residence may be sold either two years prior to or after the purchase or new construction of the replacement primary residence and qualify.

Critical Facts Concerning Proposition 19 

An inherited home must be a primary residence to be eligible for property tax breaks.   Moreover, $1,000,000 of the other property is eliminated.  As a primary residence, the assessed value plus $1,000,000 will not be reassessed (and according to BOE will be adjusted for inflation starting Feb 16, 2023).

•  Heirs (children of parents leaving real property as a gift or an inheritance) has to file a homeowners’ exemption or disabled veterans’ exemption within 12-months instead of 3-years as stipulated previously; and the inherited home must be a primary residence.

•  If the current property value is larger than the assessed value plus $1,000,000 , the property will be reassessed at fair market value (i.e., existing property tax rates) minus $1,000,000.

Proposition 13 Rules & Regs Still Alive and Well in California

The BOE confirms that only one heir has to move into an inherited house.  That heir (i.e., child of the parent leaving the property to the heir) is expected to move into that primary home within twelve months of the date of the parent’s death.  The heir is also expected to complete and file a “homeowner’s  exception claim” within one year of the parent’s death. Even if the parent does not own 100% of the property, a $1,000,000 exclusion will apply to their share.  It is essential that the heir understands that the inherited home must be  a primary residence; however, a period of “temporary absence” is allowed.

It is crucial for those families involved with agricultural activities, and inheriting a family farm, to take note of the fact that a family farm does not have to be a primary residence.  If the date of parental death, or transfer, is prior to Feb 16, 2021 – it preserves Proposition  13.  Naturally, all the correct documents must be  completed, and filed within the proper deadline. 

Gift deeds signed by Feb 15, 2021 do not have to be recorded by that date, in accordance with a CA State Board of Equalization stipulation on Feb 16, 2021.  The $1,000,000 assessed value exclusion applies to inherited assets and gifts.






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.

 

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

Property Tax Information

Inheriting A Home From A Parent in a Trust or Probate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:  Are forms a potential area for mistakes?

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

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

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

Question: What else would be a common paperwork error?

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

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

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

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

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

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

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

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

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

                            _____________________

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


 

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.