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.

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!

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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