California Prop 19 Implications

[pc95]

California passed Proposition 19 which in February 2021 will put inheritance restrictions on real estate property tax exclusions. Specifically, if a child now inherits property, they will have his property tax rate basis raised to the current Fair Market Value if he does not live (or move into) the property (as primary). In many areas in CA this becomes a large tax burden if the basis is stepped up due to the exorbitant prices.

Some questions:

Can this be solved by the parents gifting the children the house prior to February 2021 - in affect adding them on the deed before the proposition takes affect so that they are joint owners?

If so, would this affect problems with the capital gains exclusions later when the parent's die as the property would not change hands at that point in the case of a desired sale of the house?

Our situation is we are 3 children. We do not want to necessarily sell the house, but do not want to be leveled with 5 to 6x the property tax rate once our parents pass on if we don't live in the residence (ie decide to rent out the house).

Has anyone tackled this problem? Or has suggestion?

Thanks.

 

[cathy63]

It's something I've been thinking about, as it will affect both DH's family and mine. DH's family moreso, as they would like to be able to keep his mother's home when she passes, and the plan was to use the funds in the estate to pay for it during our generation's lifetimes and let the grandchildren be the ones to sell when they inherit. If the property is reassessed, this plan falls apart because the costs of keeping it become so large that it would drain the available funds in about a decade, and we'd either have to kick in our own money (I am not interested in doing that and some of the siblings couldn't afford it anyway) or sell it then.

Giving the property to the children now does seem to be one way to handle things if the parents want to go that route. The giver has to file a gift tax return and it might be a good idea to have an appraisal to substantiate the actual value that was given since this gift will eventually have to be accounted for in the estate tax return.

The children will get the parents' basis for the portion of the home that is given to them, so if they eventually sell the property, they will owe cap gains tax on the entire gain. Only the portion that the parents keep will be eligible for the step-up in basis that normally comes with inherited property.

If things change and the house is sold while the parents are alive, then only the parents would get to exclude a portion of the capital gain because they would be the only ones who meet the residency test (2 yrs of the previous 5).

If the last surviving parent goes on medicaid within 30 months, then the state can come back and retrieve the assets that were given away.

 

[pc95]

It's something I've been thinking about, as it will affect both DH's family and mine. DH's family moreso, as they would like to be able to keep his mother's home when she passes, and the plan was to use the funds in the estate to pay for it during our generation's lifetimes and let the grandchildren be the ones to sell when they inherit. If the property is reassessed, this plan falls apart because the costs of keeping it become so large that it would drain the available funds in about a decade, and we'd either have to kick in our own money (I am not interested in doing that and some of the siblings couldn't afford it anyway) or sell it then.

Giving the property to the children now does seem to be one way to handle things if the parents want to go that route. The giver has to file a gift tax return and it might be a good idea to have an appraisal to substantiate the actual value that was given since this gift will eventually have to be accounted for in the estate tax return.

The children will get the parents' basis for the portion of the home that is given to them, so if they eventually sell the property, they will owe cap gains tax on the entire gain. Only the portion that the parents keep will be eligible for the step-up in basis that normally comes with inherited property.

If things change and the house is sold while the parents are alive, then only the parents would get to exclude a portion of the capital gain because they would be the only ones who meet the residency test (2 yrs of the previous 5).

If the last surviving parent goes on medicaid within 30 months, then the state can come back and retrieve the assets that were given away.

Does the property ownership have to be divided equally? So is this something where we have to decide between capital gains vs nasty drawn out property tax? With 3 of us and 1 parent, how is the capital gains figured upon new ownership? Date of new ownership the fair-market-value is taken?
I thought the capital gains exclusion was $250,000 per owner at time of sale. If there are 3 of us - doesn't that make the exclusion $750,000?

 

[cathy63]

Does the property ownership have to be divided equally?

No, you can record a deed where each person owns a different percentage of the property as long as the total is 100%.

So is this something where we have to decide between capital gains vs nasty drawn out property tax?

If you want to keep the property and avoid higher property taxes, then you either have to live in it full time after you acquire it, or you have to take ownership now. If you want to sell the property soon after your parent passes and minimize capital gains, then it's better to wait and get a stepped up basis. Yes, you (well really your parent) have to make a choice. I don't see any way to have it both ways.

With 3 of us and 1 parent, how is the capital gains figured upon new ownership? Date of new ownership the fair-market-value is taken?

Everybody will have a basis in the property. The gain is (roughly) the sales price minus the basis. If your parent gives you a share of the house while still alive, then your basis is the same as theirs and you have a large gain when you sell. If your parent dies and you inherit the house, then your basis is the fair market value of the house on their date of death and you have a smaller gain when you sell. If your parent gives you 1/4th of the house now and you inherit 1/12th when they die, giving you 1/3rd total, then you will get a step-up only on the 1/12th that you inherit.

The basis used for calculating capital gains is not related to the assessed value the county uses to calculate your property tax. These numbers can differ by millions for inherited property. The effect of Prop 19 will be to bring the basis and assessed values closer together for inherited properties that are kept as rental or vacation homes.

I thought the capital gains exclusion was $250,000 per owner at time of sale. If there are 3 of us - doesn't that make the exclusion $750,000?

Each person who takes the exclusion has to have lived there for two years of the previous five. If you are not planning to use the property as your primary residence, then you won't get an exclusion.

 

[wolf]

Many of us got fooled. Prop 19, had 3 parts. Part 1, help fire victims, and elderly, move and retain their original property tax. (good). Help fire fighters. (good). Change part of prop 13. (bad). This was so sneaky. I did not see this. All TV ads, emphasized, helping the elderly.

Hopefully, We can get this repealed, once the word gets out. This proposition 19 failed to pass in 2019.

In my case, my children will have a difficult time, affording to live in inherited properties. Even in the family home.

Read the fine print. EVEN IF YOUR CHILDREN LIVE IN YOUR INHERITED house, the market value -( "assessed prop. value" + $1 million), The difference is reassessed and added to current property assessment.

Especially, bad in California, where we have high home prices.

Rental property is reassessed to market value at change of ownership.

 

[Peter]

Many of us got fooled. Prop 19, had 3 parts. Part 1, help fire victims, and elderly, move and retain their original property tax. (good). Help fire fighters. (good). Change part of prop 13. (bad). This was so sneaky. I did not see this. All TV ads, emphasized, helping the elderly.

The first paragraph of the Prop 19 voters guide sets out everything very clearly. I don't see anything 'sneaky'.

https://voterguide.sos.ca.gov/propositions/19/

 

[TrvlBug]

The first paragraph of the Prop 19 voters guide sets out everything very clearly. I don't see anything 'sneaky'.

https://voterguide.sos.ca.gov/propositions/19/

As did the ads.

 

[cathy63]

Many of us got fooled. Prop 19, had 3 parts. Part 1, help fire victims, and elderly, move and retain their original property tax. (good). Help fire fighters. (good). Change part of prop 13. (bad). This was so sneaky. I did not see this. All TV ads, emphasized, helping the elderly.

Hopefully, We can get this repealed, once the word gets out. This proposition 19 failed to pass in 2019.

In my case, my children will have a difficult time, affording to live in inherited properties. Even in the family home.

Read the fine print. EVEN IF YOUR CHILDREN LIVE IN YOUR INHERITED house, the market value -( "assessed prop. value" + $1 million), The difference is reassessed and added to current property assessment.

Especially, bad in California, where we have high home prices.

Rental property is reassessed to market value at change of ownership.

I thought the ballot statement was clear that inherited property would be affected. There was some coverage in the press of the "Lebowski Loophole" after it came out that the Bridges brothers were renting out the Malibu home they inherited from their parents for something like $16K/month while paying about $5K in annual property tax. The thing is, this doesn't directly affect the majority of the population (though renters will end up paying for higher property tax in the end), so it's easy to sell the narrative of soaking the "wealthy landowners", and especially so when you have a catchy marketing slogan.

The way I read the law, the $1M is actually subtracted, not added, to the FMV for an owner-occupied property in order to get the new assessed value.

For example, if you purchased your home for $50K in 1970, you're probably paying about $2K/yr in property tax now.

If the home is worth $2.5M when you die, then if your heirs move into the house, the new assessed value will be $2.5M-$1M=$1.5M and the tax will be about $16K. If they don't move into the house, then the assessed value will be for the full $2.5M and the tax will be about $27K. Prop 13 still applies going forward, so their tax increases are capped at 2% per year once the initial value is set.

 

[ivinsfan]

I don't live in CA so those of you that do help me out here.

It seems like a case of picking through each and every tax benefit and picking and choosing each one to your advantage. In the 50K house in 1970 your relatives would be paying around 2K taxes which seems more then reasonable for a high tax state like CA.

The house will sell for many multiples of that 50K price and so the taxes will go up. Why should it make any difference if the house goes to family or a stranger. It's not like they are back charging you for the 50 years of lower taxes, you will just start paying the going rate. Why do some of you think this isn't fair?

 

[stepford]

Many of us got fooled. Prop 19, had 3 parts. Part 1, help fire victims, and elderly, move and retain their original property tax. (good). Help fire fighters. (good). Change part of prop 13. (bad). This was so sneaky. I did not see this. All TV ads, emphasized, helping the elderly.

Not to be too harsh, but maybe you should consider actually reading the proposition you're voting on rather than basing your vote on TV spots placed by advocacy groups. FWIW I suspect that's also why many voted for Prop 22 after seeing the zillions of slick ads bought by Uber and Lyft to ensure they'd never have to pay benefits to their drivers.


Regardless, apart from the impact on the heirs of wealthy property owners, it will be interesting to see how Prop 19 affects property values in various parts of the state. For some time I've expected that we would be leaving CA once DW's part time work at a local college ends. Now, though, the possibility of a low tax home elsewhere in the state is interesting. That said, it may be equally interesting to millions of other CA retirees, resulting in a price boom which negates any tax benefit. I guess we'll find out which over the next few years.

 

[Gumby]

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.

 

[ivinsfan]

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.

Yep and if you own farmland it can be a real shocker....when we figure input costs every year, the input cost per acre of cropland is higher EVERY single year. Tracts of farmland are adjust for price every calendar year.

 

[pb4uski]

The property tax regimen in California seems to be the accumulated effect of a number of initiatives that sounded like good ideas at the time but are much less so 20-40 years later and result in a very dysfunctional and inequitable system of taxation when you can have extreme disparity in property taxes paid by two different properties of the same value that are next door to each other. No thank you.

https://www.sfchronicle.com/busines...-shows-how-much-property-tax-you-15685009.php

Totally at random, I picked 23rd Avenue between Pacheco and Ortega in San Francisco’s Sunset District, where homes tend to be of the same size and vintage. The tax on one house, which sold in 2015, is $21,400 a year. Four doors down, the tax is about $1,400 a year. Both are roughly 1,900 square feet and built in 1941. Zillow estimates their market values between $1.6 million and $1.7 million.

It’s easy to spot disparities because the highest-taxed properties in a neighborhood appear in red, the lowest in green, and all others are in black. Clicking on a home takes you to the county tax record for that address.

 

[cathy63]

I don't live in CA so those of you that do help me out here.

It seems like a case of picking through each and every tax benefit and picking and choosing each one to your advantage. In the 50K house in 1970 your relatives would be paying around 2K taxes which seems more then reasonable for a high tax state like CA.

The house will sell for many multiples of that 50K price and so the taxes will go up. Why should it make any difference if the house goes to family or a stranger. It's not like they are back charging you for the 50 years of lower taxes, you will just start paying the going rate. Why do some of you think this isn't fair?

I don't really think it's unfair; but it is sad that DH's family will have to give up a property that they've owned for more than 100 years. It's not so different from stories of mid-west farmers having to sell off the family homestead to pay taxes, but it is something we haven't really had to deal with in California during the lifetimes of most residents.

 

[ivinsfan]

I don't really think it's unfair; but it is sad that DH's family will have to give up a property that they've owned for more than 100 years. It's not so different from stories of mid-west farmers having to sell off the family homestead to pay taxes, but it is something we haven't really had to deal with in California during the lifetimes of most residents.

Give up is a relative term, the family can have the cash in the pocket or keep the house and pay the taxes. They do have choices.

 

[stepford]

It's no surprise that people usually vote for their economic interest, whether or not it's "fair" in any larger sense. Prop 13 clearly created winners and losers in California, with some of the biggest winners being corporations and multi-generational dynasties that own properties now taxed at 40+ year old rates.

Maybe this is good, maybe not, but the only way it will change is if some of the advantaged home owning class, who are now a majority in CA, see some benefit in changing the law. Prop 19 was cleverly crafted to do just that. It provides a benefit to some of the advantaged class (old, long time CA homeowners like me) at the expense of some of the multi-generational real estate dynasties. Ordinarily, we old fogies are selfish enough to be unwilling to touch Prop 13, but Prop 19 provided us with just enough of a bribe to peel us away from the other Prop 13 preservationists.

After years of attempts to defang Prop 13 I think CA legislators have realized that the only way they will be able to do so is in a piecemeal approach removing a little bit at a time with measures like Prop 19.

 

[cathy63]

Give up is a relative term, the family can have the cash in the pocket or keep the house and pay the taxes. They do have choices.

They can't afford to pay the taxes at the new rates for very long, so it's not really a choice. If they don't sell it themselves, then eventually they will lose it to a tax foreclosure, but either way it's gone.

It's an accident of historical timing that an upper-middle-class family ended up owning something that nowadays would more typically belong to a much wealthier individual. But yes, they will get a lot of $$$ as a result of the sale when the time comes.

 

[ivinsfan]

They can't afford to pay the taxes at the new rates for very long, so it's not really a choice. If they don't sell it themselves, then eventually they will lose it to a tax foreclosure, but either way it's gone.

It's an accident of historical timing that an upper-middle-class family ended up owning something that nowadays would more typically belong to a much wealthier individual. But yes, they will get a lot of $$$ as a result of the sale when the time comes.

So that tax break served the original family member well as they didn't have to make the choice to stay and pay or sell. It served it's original purpose.

 

[rodi]

I have a different take on prop 19.

Prop 19 allows us to potentially downsize to a beach condo, with less worry about price.

Prior to prop 19 you were strictly limited to properties bought for less than the properties you were purchasing. This allows you to purchase for more, and transfer the portion of the sales price to the new properties purchase price. Since we are hoping to be closer to the beach (walkable to the sand) the prices of many of the condos are higher. (Even just 3 miles as the crow flies, inland, makes a big difference in the price/sf.)

Add to the mix the fact that we have a granny flat that is *not* included in our transferable tax basis - but the county gives NO guidance on how they will determine what portion of the sale price is for the primary home and land, and what portion is for the granny flat. Prior to prop 19 we would have had to guess how much the county would allocate for the granny flat, and how much for the land and primary home. The county (we've asked) cannot tell us ahead of time what that proportion is or what formula they use.

The tax basis is extra important (to us) to transfer because we have my parents original tax basis because we bought from my dad when he downsized. For us, we wouldn't be able to pass on the basis to our kids because it's one and done. But we *can* take advantage of our own transfer to a new place.

Selfishly I voted for prop 19 - it is TOTALLY in my best interest.

And - since we lived in the house - it would not have been an issue anyway, when we purchased from Dad.



FWIW - the block we live on has at least 5 homes that are second generation, having bought or inherited from the parents. And since there are some folks who bought in the 60's and 70's who are getting on in years and have grown children, I suspect another 10 or so homes may transfer in the next 5-10 years.

Buying from dad and being able to transfer the tax basis allowed us to afford this neighborhood - it's not a fancy neighborhood - but it's VERY expensive for people buying in now.

 

[pb4uski]

But aren't the embedded inequities in property taxes eventually going to cause really big problems? It would seem at some point that some adverse unintended consequences will come home to roost and it might not be pretty.

 

[ronin]

But aren't the embedded inequities in property taxes eventually going to cause really big problems? It would seem at some point that some adverse unintended consequences will come home to roost and it might not be pretty.

Prop. 999 to the rescue then?

 

[cathy63]

But aren't the embedded inequities in property taxes eventually going to cause really big problems? It would seem at some point that some adverse unintended consequences will come home to roost and it might not be pretty.

Well, the alternative seems to be that we go back to the '70s when people were losing their homes because property values were rising a lot faster than wages and Social Security. That wasn't pretty either and it had plenty of adverse consequences. I was too young to vote then, but I do remember when Prop 13 passed, and I don't think most Californians want to go back to those before-times.

The ability to pass the property tax basis to children was added about 10 years later, and to grandchildren about 10 years after that. It's those later additions that were repealed by the passage of Prop 19 this month. Every property will now get reassessed when it changes hands, whether within the family or not, so inequities can only build up for one person's/couple's lifetime.

 

[pc95]

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.

 

[TrvlBug]

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.

I'd sell the house rather than co-own with siblings .

 

[rodi]

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.

Why couldn't the person choosing to live in the house buy out the siblings? That happens all the time. One of my neighbors is living in the house he grew up in... He bought out his brothers share when their mom passed on.

The other option is to have all 3 siblings sell the property and split the proceeds. Again - this happens all the time.

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

Prop 13 was about keeping the home affordable for the homeowner who lived there. A side benefit was that it also helped landlords with investment properties. As you are probably aware - that feature was also on the ballot - prop 15. It would have kept the tax benefit for residential investment rentals, but do away with it for commercial properties above $3M. It did not pass - so landlords continue to receive the tax benefit for commercial properties... indefinitely if they buy/sell through holding companies or LLCs.