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.

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

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

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

Parent-to-Child Transfer to Avoid Property Tax Reassessment

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

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

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

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

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

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

Assembly Constitutional Amendment 9: Efforts to Reinstate Prop 19

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

 

 

PART TWO: California Beneficiaries Learn How to Make Prop 19 Work For Them

How California Prop 19 Works

How California Prop 19 Works

Interestingly enough, even though certain members of the press now oppose Proposition 19 as if they had been defending this position all this time – when in actual fact they had been trying to convince Californians that their Prop 58 parent to child transfer, to avoid property tax reassessment, their parent to child exclusion from being taxed at current rates, or their right to buyout a sibling’s share of their inherited property, was a negative.

When in fact they now admit that for property owners, heirs and beneficiaries inheriting property from parents – all these tax breaks are clearly a positive benefit for California residents. And in the real world, away from ideology, there is no disputing it.

So like many residents, after Proposition 19 was voted into law, the California press also found themselves experiencing “buyer’s remorse” once the dust had settled a bit and Prop 19 actually became a reality, for better or for worse.

Confusing things even more, investigative reporters at the Los Angeles Times created the “Lebowski Loophole” in 2018, named after actor Jeff Bridges. The Times reported that “Jeff Bridges, together with his brother Beau and their sister were paying only $5,700 a year in property taxes on a 4-bedroom Malibu home with access to a semi-private beach and panoramic views of the Pacific Ocean; inherited from their parents, who bought it in the 1950’s; but none of the Bridges siblings lived there.

Apparently, the Bridges family was renting out their beachfront property for $15,000 a month. This urban legend is still the only example used by the press, year after year, to support anti property tax relief arguments. They use this one example to represent a supposed army of folks doing the same thing… and yet, surprisingly, have not come up with the name of another family investing in high-end property under Proposition 13, getting off easy on taxes, and renting out their property out for huge financial gain.

In all these years, for whatever reason, the press has never come up with the name of another family as even a second example of this type of supposed “property tax abuse” showing how Proposition 13 is abused by California inheritors.

The truth is, by and large, most middle class families inheriting property are taking advantage of the parent-to-child exclusion tax break merely to survive and to be able to afford to inherit property without getting killed on the tax hit. Middle class folks that are merely trying to live with a degree of comfort and class in a hyper expensive state, where all the good things have been established with the wealthy in mind – the flashy cars, the beachfront properties, the large homes with beautiful lawns and pools, the fancy restaurants, and the red carpets… The fame and success, that everyone stops and stares at, and admires.

Still held over from Prop 58, we now have similar, albeit more limited, Proposition 19 parent-to-child exclusion benefits, for beneficiaries who want to avoid property tax reassessment; who want to keep inherited property from parents and keep parents property taxes.  They support the  transfer of property taxes when inheriting property taxes from a parent.
Property tax transfer, the ability to transfer parents property taxes, keeping property at a low base rate is top of mind for every homeowner and property inheritor in California.

Parent to child transfer – their parent to child exclusion from property reassessment is the only benefit that makes it possible to be able to establish a low Prop 13 property tax base, the same as their parents had… Plus the transfer of property between siblings, to be able to buyout co-beneficiaries who are looking to sell their inherited property shares.

In reality, this type of property tax relief, by being able to transfer parents property taxes, accomplishes exactly what is was set out to do – protect residents’ property tax rates, and give the middle class some sense of property tax stability; to have a sense of pride and security over the years.

Were it not for Prop 13, you can rest assured property taxes would be sky high by now, practically unaffordable for many; and certainly a struggle for most.