California Prop 19 Implications

[cathy63]

So if nothing is done prior to Feb 2021, and sometime in the future when inherited with 3 heirs divided equally, if only 1 of 3 choose to live in the parent's house, what happens to the property tax basis? Does 2/3 of it get reassessed (increased)? I'm reading that all 3 owners must live in the house within 1 year to get the full benefit up to $1 million dollars.

If all 3 siblings inherit a property such that each owns 1/3, and only one lives in it, then I believe you can apply for the $1M reduction on one third of the home. As I understand it, the new assessment base should be 2/3 of the current FMV, plus 1/3 of the current FMV minus $1M. This only works if the current FMV is at least $3M greater than the parents' base value, because there's no reduction if the increase on the resident-owner's share is less than $1M.

The assessor is only going to issue one tax bill per property, so it's up to you and your co-owners to decide how to pay it. There's nothing stopping you from dividing it by 3, which effectively gives you each 1/3 of the exclusion.

It only adversely effects people who are converting it from primary home of (now deceased) parent, to a rental/investment property.

It also adversely affects heirs who want to live in the inherited home as their primary residence if the value of the home has increased by more than $1M since the parents' property tax base was established.

 

[pc95]

We finally talked to my mother's estate attorney who recommended she do nothing because:

1. Deeding house now takes away future gifting/flexibilities
2. Deeding house to multiple children/in-laws increases liabilities (lawsuits/creditors) going after house if in children's names.
3. Deeding house forsakes the step-up basis at death for capital gains.

Does California levy capital gains for real-estate on top of federal 20%?
I've read 13%. Does CA have an exclusion if living in house 2/5 years like federal?

Attorney recommended alternatively "horse-trading" following passing which he said was the norm.

But there are other wrinkles in our situation that the new law exacerbates . Our widowed mother got remarried in 2000, and now does not fully trust our step-father who earlier agreed to respect the trust, but according to mom has made some statements during more recent discussions about community property that has worried my mother. He has far less assets than she does, and made the choice to retire earlier than her with less for more time - now his savings are dwindling faster (he's fairly poor with finances to begin with). Also she had in her trust the direction that he could live 2 years in the house as a transition. By deeding house early those worries are mitigated. His son (my step-brother) is barely skating by financially, deciding not to work (on disability and something like section 8). I think my step-dad feels pressure to leave his own assets to his son. However my stepbrother has barely worked 10 years @ 44 yro (none in the last 15). I have mixed feelings about that part of it.

Other than those, main problem inheritance-wise with the new law, only gives 1 year to move into the house for property tax exclusion (compels one of us to move in if interested in the house). In the near and medium term, that will be a problem for timing if any of us would like to "horse-trade" and keep the house and live in it to preserve the very favorable property taxes due to work and school locations. It effectively hand-cuffs one (or more) of us to the house for the exclusion.

2 of 3 of us have not purchased property yet. Youngest sister cannot afford to purchase either; she and boyfriend are not fully financially established (he is finishing his PHD), and she works for a modest salary - they are close to month-to-month.

So its not an easy decision at all - i feel like there are downsides either way - its frustrating being put on the clock...
Would've been better (more flexible) if given a 2nd or 3rd year of exclusion transition time.


Thoughts on best recourse?

Thanks.

 

[cathy63]

...Does California levy capital gains for real-estate on top of federal 20%?
I've read 13%. Does CA have an exclusion if living in house 2/5 years like federal?

California does not have a special tax rate for capital gains. It's all lumped in with income and taxed at the same reate.

Yes, California lets you exclude $250K ($500K if married) of the home's selling price from income if you've lived there 2 out of the last 5 years and haven't used the exclusion during the previous 2 years.

The 13.3% rate is a marginal rate on income over $1M/yr. Your first $1M of earnings or cap gains is taxed at lower rates.

Attorney recommended alternatively "horse-trading" following passing which he said was the norm.

But there are other wrinkles in our situation that the new law exacerbates . Our widowed mother got remarried in 2000, and now does not fully trust our step-father who earlier agreed to respect the trust, but according to mom has made some statements during more recent discussions about community property that has worried my mother. He has far less assets than she does, and made the choice to retire earlier than her with less for more time - now his savings are dwindling faster (he's fairly poor with finances to begin with). Also she had in her trust the direction that he could live 2 years in the house as a transition. By deeding house early those worries are mitigated. His son (my step-brother) is barely skating by financially, deciding not to work (on disability and something like section 8). I think my step-dad feels pressure to leave his own assets to his son. However my stepbrother has barely worked 10 years @ 44 yro (none in the last 15). I have mixed feelings about that part of it.

Other than those, main problem inheritance-wise with the new law, only gives 1 year to move into the house for property tax exclusion (compels one of us to move in if interested in the house). In the near and medium term, that will be a problem for timing if any of us would like to "horse-trade" and keep the house and live in it to preserve the very favorable property taxes due to work and school locations. It effectively hand-cuffs one (or more) of us to the house for the exclusion.

2 of 3 of us have not purchased property yet. Youngest sister cannot afford to purchase either; she and boyfriend are not fully financially established (he is finishing his PHD), and she works for a modest salary - they are close to month-to-month.

So its not an easy decision at all - i feel like there are downsides either way - its frustrating being put on the clock...
Would've been better (more flexible) if given a 2nd or 3rd year of exclusion transition time.


Thoughts on best recourse?

Thanks.

Since you asked, I think your best recourse is to step away and let your mother do as she wishes with her estate. You've made her aware of the effect of the new law and now it's her decision. She's entitled to leave her husband of 20+ years a life estate (or a 2 year occupancy right) in her own home if she wants to, even if that means you and your sibs don't get to take advantage of the lower property tax basis.

Also, it could be that the house is really community property now, even if your mother owned it before she married and it's in her separate trust. If your mother used community funds, i.e. money she earned at a job while married or money from a joint brokerage account, to pay the property tax or make improvements, then her husband may have a legitimate claim to the house or part of its value. It's moot anyway unless she dies first. Do you have reason to believe that will happen?

I don't think the new law really handcuffs you to an inherited house. As far as I know, the law doesn't specify how long you have to live there and turning a residence into a rental property doesn't cause a reassessment of your property tax.

 

[calmloki]

So back in 2010 we bought (joint with right of survivorship) a house in La Quinta Ca for $141k. County of Riverside had it valued at $191k for property taxes, which we were going to appeal, but they said they automatically revalued to the purchase price. Gal declared it as her primary residence and lives here over 1/2 the year. Since then the tax value has crept up to $166k and the property tax is now $2588. Comps in the area indicate a sale price of $400k+ is plausible.
Does that mean if we sold Gal could write off her ~$250k profit as a tax free gain for fed taxes and then buy some property worth say $850k here in California, transfer her $166k tax basis to it, and pay $2588 in property tax on the new property? Or would she owe $2588 property tax on the transferred $400k basis and more property taxes on the remaining $450k value in the new $4850k place?

 

[cathy63]

So back in 2010 we bought (joint with right of survivorship) a house in La Quinta Ca for $141k. County of Riverside had it valued at $191k for property taxes, which we were going to appeal, but they said they automatically revalued to the purchase price. Gal declared it as her primary residence and lives here over 1/2 the year. Since then the tax value has crept up to $166k and the property tax is now $2588. Comps in the area indicate a sale price of $400k+ is plausible.
Does that mean if we sold Gal could write off her ~$250k profit as a tax free gain for fed taxes and then buy some property worth say $850k here in California, transfer her $166k tax basis to it, and pay $2588 in property tax on the new property? Or would she owe $2588 property tax on the transferred $400k basis and more property taxes on the remaining $450k value in the new $4850k place?

For the first question, yes she can exclude $250K of her profit from both her Fed and State income in the year you sell the house.

The transfer of basis is more complicated. Is she over 55? Are you married? Would you own the new property jointly? If she were over 55 and the only owner of the current property, then her new tax basis at the new property would be $166K+($850K-$400K) = $616K.

For the case where you are an unmarried joint owner who does not reside in the original home I don't know how the assessors are supposed to deal with that. It might be that she only owns 50% of the property and 50% of the basis and you can't transfer your basis since it's not your primary home, so the new tax assessment would be based on $83K+($850K-$200K) = $733K.

 

[pc95]

California does not have a special tax rate for capital gains. It's all lumped in with income and taxed at the same reate.

Yes, California lets you exclude $250K ($500K if married) of the home's selling price from income if you've lived there 2 out of the last 5 years and haven't used the exclusion during the previous 2 years.

The 13.3% rate is a marginal rate on income over $1M/yr. Your first $1M of earnings or cap gains is taxed at lower rates.



Since you asked, I think your best recourse is to step away and let your mother do as she wishes with her estate. You've made her aware of the effect of the new law and now it's her decision. She's entitled to leave her husband of 20+ years a life estate (or a 2 year occupancy right) in her own home if she wants to, even if that means you and your sibs don't get to take advantage of the lower property tax basis.

Also, it could be that the house is really community property now, even if your mother owned it before she married and it's in her separate trust. If your mother used community funds, i.e. money she earned at a job while married or money from a joint brokerage account, to pay the property tax or make improvements, then her husband may have a legitimate claim to the house or part of its value. It's moot anyway unless she dies first. Do you have reason to believe that will happen?

I don't think the new law really handcuffs you to an inherited house. As far as I know, the law doesn't specify how long you have to live there and turning a residence into a rental property doesn't cause a reassessment of your property tax.

Thanks for the input Cathy63. Additional Background: our mother had a very difficult time with her "main" inheritance herself in the mid-80s when her own step-mother put forth a 1950s will from her father after his death, and told mom and her brothers "if you play your cards right, you'll be ok" my mom told me. Her brothers could not believe their father hadn't done any new planning since the 50s. He was a career military officer who served in WWII. My uncles litigated, but my mom was apparently deflated (emotionally) and bowed out of the situation. I think this may inform her experience and decision making.

Yes, its her decision - we are just discussing together and including brother/sister and stepdad a bit. I have thought of a workaround in the do-nothing case that I need to ask her attorney. I do not necessarily want to push my mom or make direct requests, but she does defer to me to a degree financially. I mean I happened upon the newspaper article that clued me in to this - I didn't actually catch it on the vote as others didn't either. There's a chance I might've missed it even

As far as my step-dad, some additional details: mom and he own a small 2nd summer house up north coast that they split in a separate trust, that she more or less given to him if she dies first and vice versa. They are actually talking about selling it now. When they got married, they were both in their mid-50s in 2000 and both working. My sister now is somewhat unhappy with my mom's living situation and thinks she would be happier divorcing - telling her as such. I dont see it as nearly as dire, though I do pay attention when she tells me she has trust issues (worries) with my stepdad. It has been a source of some amount of strain I think in her marriage with some instances of dishonesty she told me about, but not many. When they married, he sold his house and did not share proceeds, paying his own daughters college loans and purchasing a car for his son - no problem, and moved in with mom - I believe he verbally agreed to the trust earlier. She pays property taxes and upkeep for the main house and they share the groceries/utilities with a joint account. They split the 2nd house down the middle. She made a point earlier to tell us she wants the main house to go to her own children (us). I dont feel like stepdad will betray that trust, but I dont know for sure (the nature of trust). I actually feel it would be harsh to tell him he has 1 year instead of 2 due to the law change if they'd already agreed to that. I told her .

I dont know who will outlive who. She is one year older, but appears in better physical health and exercises much more regularly.

This thing has been a big headache since finding out in November. Its history in February, but feels alot like a term project or work assignment.

 

[Music Lover]

Around here, your house gets reassessed every five years, and your taxes are adjusted accordingly. Doesn't matter how long you've owned it. The assessed value usually goes up and the mill rate usually goes down. Averaged over the whole town, it results in taxes being the same, although if your property is in a desirable location and your home value has appreciated faster than other parts of town, your taxes will be higher. That's what has always happened to us.

It's the same here. That's the only fair way to do it.

 

[wolf]

PC. Your Mom's San Diego house. Is it worth much more than $ 1 million. (you don't have to answer that question). If not, you may not have a problem with prop 19.
If it is worth much more. Step-dad may not be able to afford living in the house.
Property tax increase will be huge?

My situation, SF Bay area. Homes are selling for $ 2 million and more. My basis very low.
One child lives with us. The other live in my other property. When, wife and I are gone.

Will be a burden on children to afford to live in "our" houses.

Have an appointment with lawyer next week. To discuss pro/cons. Lawyers in my area are not taking new clients. As people become aware of new law.

From what I've read, and what I need to confirm with lawyer, put simply:

1. If children do not plan to keep inherited property, do nothing. Property gets step up
in basis. Children sell. No capital gains tax.

2. If children intend to live in property, no intention of selling. Then take action
to lock in Prop 13 rule. Keep parents property tax. But forfeit "step up in basis".

3. Irrevocable Trust, will accomplish this. And maybe keep the step up in basis?

4. Gifting. Will work. But more risky.

5. Weird. The law passed, and confirmed. But State of Calif. still finalizing the details.
So, lawyer's working on plan of action, on a law that is still changing.

 

[pc95]

PC. Your Mom's San Diego house. Is it worth much more than $ 1 million. (you don't have to answer that question). If not, you may not have a problem with prop 19.
If it is worth much more. Step-dad may not be able to afford living in the house.
Property tax increase will be huge?

My situation, SF Bay area. Homes are selling for $ 2 million and more. My basis very low.
One child lives with us. The other live in my other property. When, wife and I are gone.

Will be a burden on children to afford to live in "our" houses.

Have an appointment with lawyer next week. To discuss pro/cons. Lawyers in my area are not taking new clients. As people become aware of new law.

From what I've read, and what I need to confirm with lawyer, put simply:

1. If children do not plan to keep inherited property, do nothing. Property gets step up
in basis. Children sell. No capital gains tax.

2. If children intend to live in property, no intention of selling. Then take action
to lock in Prop 13 rule. Keep parents property tax. But forfeit "step up in basis".

3. Irrevocable Trust, will accomplish this. And maybe keep the step up in basis?

4. Gifting. Will work. But more risky.

5. Weird. The law passed, and confirmed. But State of Calif. still finalizing the details.
So, lawyer's working on plan of action, on a law that is still changing.

If your houses are over $1 million in value, then yes, there would be a property tax increase and some additional cost (burden). My sister's boyfriend/significant other's family is in Berkeley, and he gave me their address. I checked and their property taxes could reset
from $10,000 to $30,000 per year right now (for example purposes) That is essentially a permanent mortgage for people in middle to upper-middle class.

My old college roommate bought a 1400 sqft house in Albany for $950,000 this year. The property tax there appears to be around 1.8% - that's $17,000 per year. They were renting for $2000 a month in Oakland for 9 years prior.

Property taxes are a big deal over time for the less wealthy.

 

[pc95]

I don't think the new law really handcuffs you to an inherited house. As far as I know, the law doesn't specify how long you have to live there and turning a residence into a rental property doesn't cause a reassessment of your property tax.

For keeping the property tax basis, I think it may. Unless one lives with their renters in the same house.

According to mom's attorney:

" the question of what is a principal residence is one of fact. Either the property is one’s principal residence, or it is not. The question is not only “where do you live”, but the state currently looks at everything from one’s vehicle registration, voter registration, and bank accounts, to state income tax filings, to determine residency (among many other factors). I would be cautious at getting “overly creative” on this front."

 

[cathy63]

For keeping the property tax basis, I think it may. Unless one lives with their renters in the same house.

According to mom's attorney:

" the question of what is a principal residence is one of fact. Either the property is one’s principal residence, or it is not. The question is not only “where do you live”, but the state currently looks at everything from one’s vehicle registration, voter registration, and bank accounts, to state income tax filings, to determine residency (among many other factors). I would be cautious at getting “overly creative” on this front."

What I meant was that the law doesn't specify how long the property has to be your principal residence, just that you have to qualify for the homeowner's exemption in the year that you transfer the basis. Yes, of course you really have to live there in order to qualify for the homeowner's exemption, but I wouldn't think of a year as being handcuffed to the property.

 

[pc95]

What I meant was that the law doesn't specify how long the property has to be your principal residence, just that you have to qualify for the homeowner's exemption in the year that you transfer the basis. Yes, of course you really have to live there in order to qualify for the homeowner's exemption, but I wouldn't think of a year as being handcuffed to the property.

Thx Cathy, what do you suppose are the estate/tax ramifications for adding 3 of us to property deed (ownerships) with mom with a very small stake say 1/33/33/33? I think it would mean that whatever small percentage is mom's would be subject to prop tax increase (assessment) in the future, but she still can act as an owner? We were talking about her insurance implications and house improvements if she wants them. If we keep a small percentage for her ownership, then she can go about normal house upkeep/projects/bills, for the future tax cost of a small % increase. I think her estate attorney may need our decision before Feb starts.

 

[cathy63]

Thx Cathy, what do you suppose are the estate/tax ramifications for adding 3 of us to property deed (ownerships) with mom with a very small stake say 1/33/33/33? I think it would mean that whatever small percentage is mom's would be subject to prop tax increase (assessment) in the future, but she still can act as an owner? We were talking about her insurance implications and house improvements if she wants them. If we keep a small percentage for her ownership, then she can go about normal house upkeep/projects/bills, for the future tax cost of a small % increase. I think her estate attorney may need our decision before Feb starts.

Well, IANAL, and you already have one of those, so I would say that you should do what he recommends. I agree that the way I read the law if she only owns 1%, then only that part of the property should be reassessed on her death if none of you makes it your primary residence at that time.

The issues I know of with giving a house to the three kids now are:
- No step-up in basis. This is a bad deal for any one of the kids who does not want to keep the house. If you're all in agreement that you're keeping it, then it's fine. (Aside: As one of 3 sibs myself, I would encourage you to say clearly in plain English that there's truly no pressure on either of your siblings to agree to this, and to honor their wishes if one of them seems reluctant to participate.)
- The house might not be able to be in her trust any more if she's not the only owner, so you might end up going through probate for that final 1%. Ask your lawyer about this. I don't know if it's an issue, it's just something that occurred to me as a possibility.
- Risk of losing the house if one of the owners is sued or divorces. You may be forced to sell in order for a sibling to get the cash to pay off a judgment.
- Mom has to file a gift tax return this year to account for passing the value of the house to the 3 kids, since it must be worth more than $15K/child or we would not be having this conversation. Not a big deal if her final estate, including the house value, is going to be less than $6M ($11M if she dies before 2026), or if an estate tax return was filed for your Dad to carry over his exemption.
- For some home improvements you need all the owners' signatures. Some contractors insist on that, although they might just assume that your Mom and Step-Dad are the owners and not realize that there are 3 other owners who could sue them.

 

[pc95]

Well, IANAL, and you already have one of those, so I would say that you should do what he recommends. I agree that the way I read the law if she only owns 1%, then only that part of the property should be reassessed on her death if none of you makes it your primary residence at that time.

The issues I know of with giving a house to the three kids now are:
- No step-up in basis. This is a bad deal for any one of the kids who does not want to keep the house. If you're all in agreement that you're keeping it, then it's fine. (Aside: As one of 3 sibs myself, I would encourage you to say clearly in plain English that there's truly no pressure on either of your siblings to agree to this, and to honor their wishes if one of them seems reluctant to participate.)
- The house might not be able to be in her trust any more if she's not the only owner, so you might end up going through probate for that final 1%. Ask your lawyer about this. I don't know if it's an issue, it's just something that occurred to me as a possibility.
- Risk of losing the house if one of the owners is sued or divorces. You may be forced to sell in order for a sibling to get the cash to pay off a judgment.
- Mom has to file a gift tax return this year to account for passing the value of the house to the 3 kids, since it must be worth more than $15K/child or we would not be having this conversation. Not a big deal if her final estate, including the house value, is going to be less than $6M ($11M if she dies before 2026), or if an estate tax return was filed for your Dad to carry over his exemption.
- For some home improvements you need all the owners' signatures. Some contractors insist on that, although they might just assume that your Mom and Step-Dad are the owners and not realize that there are 3 other owners who could sue them.

Hi Cathy,
The question came up, if (re)deeding now to 3, if in the future if one of kids die or want give up share, do the other 1 or 2 keep the original property tax rate? I would think so. In our case 33/33/33 -> 50/50. Thx....