Own a Home? You May be Impacted by These Upcoming Changes

This past November, California voters approved Proposition 19, which is now set to revamp certain tax issues regarding home ownership. In particular, those who inherit real property in the state might face surprising property tax burdens.

Prior to Prop 19, children (or possibly grandchildren) who inherited their deceased parents’ primary home could also “inherit” the tax basis for that property. Without a requirement for a fair-market reassessment upon transfer, heirs would continue paying the same tax amount once imposed upon their parents. In most cases, that tax amount was significantly lower than an amount based on the current fair market value on the date of death or transfer.

Also, previously, secondary properties such as vacation homes, rentals, or commercial properties could be transferred to children with $1 million of the new assessed value excluded from taxation.

However, the passage of Prop 19 is set to change those rules beginning February 16, 2021* when the law takes effect. Inherited properties will now be reassessed at current fair market values, and the heirs will face larger property tax bill as a result.

Those who inherit their parents’ real estate properties will face a few choices:

  • If the inherited property is used by the children as a primary residence, then $1 million of the reassessed value can be excluded from the new property tax basis.
  • If the heir chooses to use the property as a second home, rental, or commercial property (or any purpose other than a primary residence) then the $1 million exclusion of property tax basis will not apply. Therefore, the child who inherits their parents’ real property will be subject to new, and likely substantially increased, property tax amounts.

With February 16th rapidly approaching, those who plan to leave real property to their children should reevaluate their estate plans. Depending upon the circumstances, other options might be available to limit the impact of this situation upon the heirs. Call our tax and estate planning attorneys soon if this situation applies to you.

*The actual deadline is Feb. 11, 2021 because Feb. 15 is a holiday, and many Recorders’ offices in California are closed Feb. 12-15. Ideally, the transfer will also be recorded before the deadline. However, the Recorder’s office is greatly backed up due to Covid-19 delays.

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