Prop 19 in California
Member since 2020 · 19 posts · 1 vote
Seems like prop 19 has passed in California. What's the best strategy with this new law, that will reassess rental property taxes to fair market value, if passed to your heirs. Since the law does not take into effect until Feb 2021, would it be recommended to now pass on property to heirs before the deadline?
@Alice Chen I think the way to do it would be to have the properties in a trust with the heirs listed as successor trustees. That way the properties just stay in the name of the trust upon death and do not get re-assessed. This would also have the added benefit of avoiding probate.
Consult your own tax/legal professionals though for specific advise unique to your own situation.
I went through this process in CA. A trust will not avoid this being considered a transfer of ownership. CA views the ownership as being owned by a person but held in a trust. When the Trustor passes then they consider the new owner to be the Trustee...with the property of the Trustor then of the Trustee held in a Trust. It does not matter if you or I agree, that is the way CA looks at it.
I managed my parent's trust. When they had both passed my siblings and I were all co-trustees. This was a CA Trust. There were 3 properties that had been titled to the Trust in CA. My parents lived, set up the trust and died on CA. The trust filed income taxes under my mom's SSN. We had a certain period of time, I think it was 150 days, to notify the assessor's office of the death of my mom. (My dad had passed previously.) There is a form available at the assessor's office.
The state of CA and ALL assessor's offices consider this as a change of ownership. This is cut and pasted from the LA County Assessor's office: "The Assessor’s Office must be notified upon the death of an owner within 150 days of the date of death, or if the estate is probated at the time the inventory and appraisal is filed. Click the button below to complete and submit the Change of Ownership Statement (Death of Real Property Owner). This form is required even if the decedent held the property in a trust."
All 3 of my parent's properties were held in LA County. They advanced reviewing my change in ownership forms to a supervisor. They wanted a copy of the entire trust, but could not read and understand it. First, they wanted proof of the relationships between trustors and trustees, so I had to provide birth certificates showing parent child relationship to avoid a new evaluation. Then since one Trustee (one of my brothers) was deceased, the Trust passed his interest on to his children as beneficiaries, but they do not become Trustees. These 2 children of my brother are grandchildren of the Trustors. So I had to provide birth certificates for my brother and for his 2 children, and a death certificate for my brother.
So all should have been well because all trustees and beneficiaries were in parent child or grandparent child relationships, all exceptions to a reassessment.
But, no, life is never that easy with a blood sucking government wanting every drop of blood out of the dead.
Someone in the assessor's office decided that when my brother died his interest passed on to his wife, so that meant her share was reassessed. So I asked them to reconsider because they were in error. The supervisor passed me on to their attorney. I explained that the Trust specifically excluded spouses and clearly stated that spouses do not inherit or in any way benefit from the trust assets but the trust assets are passed on to the children. I resent that page to the attorney, who said, yep, I was right. (well, yes, I spent a lifetime using this Trust, I knew what it said, and what it mean.) So the County attorney told the supervisor I was correct and that the Trust did not pass anything to spouses and the children were grandparent/grandchild relationship, so there was no reassessment.
FINALLY! A year after the property was sold! A year and a half after my mom passed away. But I did not get a supplemental tax bill, so all was well.
So, I can absolutely guarantee that a Trust will NOT save you from this new proposition. I am not an attorney, but do battles with them as needed.
thanks- would it make sense to add the children to the deed now then?
I don't think it is retroactive. Only for ppl who inherit a property moving forward.
If you add your children now, I believe you will trigger a reassessment.
I think your best bet would be to do a 1031 exchange and move the $$ outside of Cali.
Looking for a CPA to chime in.
"What's the best strategy with this new law, that will reassess rental property taxes to fair market value, if passed to your heirs."
See if a trust with rights of survivorship would work for a transfer.
On the 1031, it'll need to be an investment property and even if you do buy something out of state and stay in Cali, the FTB is pretty agressive. I've got guys that did that in OR and FTB called them after they sold their bldg here since they were Cali residents.
@Steve Morris, my cpa has told me that there is a form you have to file w Cali Ftb for every year you own an out of state property where the proceeds of a 1031 were from a Cali property. Only way out: death!
Welcome to the ‘Hotel California’.
@Alice Chen I think the way to do it would be to have the properties in a trust with the heirs listed as successor trustees. That way the properties just stay in the name of the trust upon death and do not get re-assessed. This would also have the added benefit of avoiding probate.
Consult your own tax/legal professionals though for specific advise unique to your own situation.
@Kyle J. This does not avoid reassessment. You have to transfer your properties before the law takes affect, if it make sense to do so. There is a parent to child exclusion that needs to be filled out. Even if you are a successor of a trust, once the trustee dies the property gets reassessed. I am an appraiser for the tax assessors office. Even lawyers tell people the incorrect information.
So the only way to do this is to add the child (in this case who is an adult) to the property's deed? House is paid off, no mortgage. So the property would have 3 co-owners (two parents and child). In essence, adult child is getting a gift.
@Kyle J. This does not avoid reassessment. You have to transfer your properties before the law takes affect, if it make sense to do so. There is a parent to child exclusion that needs to be filled out. Even if you are a successor of a trust, once the trustee dies the property gets reassessed. I am an appraiser for the tax assessors office. Even lawyers tell people the incorrect information.
How would the county tax appraiser's office even know? If the property is in the name of the trust, and not the individual/parent, the child (successor trustee) could just leave it in the name of the trust and take over control of the property once the parent dies. What would trigger the reassessment?
Do people expect this to have a large impact on the market in CA? I suspect there will be some people after Feb 15, 2021, who inherit a property and don't realize their property taxes are going drastically higher than what their parents were paying. Even if they move in, the tax exemption is limited to the first million, so people may decide to just sell, esp if we still preserve the step-up in basis in 2021.
@Steve Morris, my cpa has told me that there is a form you have to file w Cali Ftb for every year you own an out of state property where the proceeds of a 1031 were from a Cali property. Only way out: death!
Welcome to the ‘Hotel California’.
It'll get worse since the prop tax thing failed on the ballot. you have an out-migration of jobs and CalPERS is not shrinking.
@Kyle J. The death certificate. Once someone dies there is an automatic change in ownership. They trust is past the the beneficiaries. To avoid a legal debate (I’m not a lawyer), I don’t want to go into the legality of it, but it doesn’t matter, if there is a change in ownership it’s going to get reassessed unless there is an exclusion. They have set up the law so people can’t hide it through trusts.
@David Chen, my expectation is that most will sell after inheriting a property.
IMHO it really sucks that the 'use' matters. Seems kind of Draconian to me. The tax rate should be the rate, regardless of use. I think there should be a court case or two brought.
But as my CPA explained to me: Very few ppl pass their property past the 2nd generation. Most ppl MOVE every 7 years or so, which changes the tax basis as well.
The ppl impacted by this are a true 'sliver'.
Hi all, In my opinion we should bring back proposition 58. To get it on a ballot, we need $2000 for starting and 630k signatures. We do not need to write a new proposal, simply take the writing from the previous prop 58 and reinstate itю
@Alice Chen I think the way to do it would be to have the properties in a trust with the heirs listed as successor trustees. That way the properties just stay in the name of the trust upon death and do not get re-assessed. This would also have the added benefit of avoiding probate.
Consult your own tax/legal professionals though for specific advise unique to your own situation.
I went through this process in CA. A trust will not avoid this being considered a transfer of ownership. CA views the ownership as being owned by a person but held in a trust. When the Trustor passes then they consider the new owner to be the Trustee...with the property of the Trustor then of the Trustee held in a Trust. It does not matter if you or I agree, that is the way CA looks at it.
I managed my parent's trust. When they had both passed my siblings and I were all co-trustees. This was a CA Trust. There were 3 properties that had been titled to the Trust in CA. My parents lived, set up the trust and died on CA. The trust filed income taxes under my mom's SSN. We had a certain period of time, I think it was 150 days, to notify the assessor's office of the death of my mom. (My dad had passed previously.) There is a form available at the assessor's office.
The state of CA and ALL assessor's offices consider this as a change of ownership. This is cut and pasted from the LA County Assessor's office: "The Assessor’s Office must be notified upon the death of an owner within 150 days of the date of death, or if the estate is probated at the time the inventory and appraisal is filed. Click the button below to complete and submit the Change of Ownership Statement (Death of Real Property Owner). This form is required even if the decedent held the property in a trust."
All 3 of my parent's properties were held in LA County. They advanced reviewing my change in ownership forms to a supervisor. They wanted a copy of the entire trust, but could not read and understand it. First, they wanted proof of the relationships between trustors and trustees, so I had to provide birth certificates showing parent child relationship to avoid a new evaluation. Then since one Trustee (one of my brothers) was deceased, the Trust passed his interest on to his children as beneficiaries, but they do not become Trustees. These 2 children of my brother are grandchildren of the Trustors. So I had to provide birth certificates for my brother and for his 2 children, and a death certificate for my brother.
So all should have been well because all trustees and beneficiaries were in parent child or grandparent child relationships, all exceptions to a reassessment.
But, no, life is never that easy with a blood sucking government wanting every drop of blood out of the dead.
Someone in the assessor's office decided that when my brother died his interest passed on to his wife, so that meant her share was reassessed. So I asked them to reconsider because they were in error. The supervisor passed me on to their attorney. I explained that the Trust specifically excluded spouses and clearly stated that spouses do not inherit or in any way benefit from the trust assets but the trust assets are passed on to the children. I resent that page to the attorney, who said, yep, I was right. (well, yes, I spent a lifetime using this Trust, I knew what it said, and what it mean.) So the County attorney told the supervisor I was correct and that the Trust did not pass anything to spouses and the children were grandparent/grandchild relationship, so there was no reassessment.
FINALLY! A year after the property was sold! A year and a half after my mom passed away. But I did not get a supplemental tax bill, so all was well.
So, I can absolutely guarantee that a Trust will NOT save you from this new proposition. I am not an attorney, but do battles with them as needed.
If you want to use the parent-child exclusion to pass property to a child without reassessment (there are some exceptions provided for in Prop 19), I would recommend that you contact an attorney right away to plan for transfers or gifts or some kind before the February implementation date. Getting personalized advice for your situation is essential.
@Kyle J. I agree that naming children as successor trustees alone is not sufficient to avoid reassessment. The Assessors office often asks for a copy of the trust when looking at the parent-child, and paperwork needs to be submitted to record the death of the trustee of the trust to keep a clean chain of title, which often includes a death certificate.
*this post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
@Katie L., this prop seems counter-intuitive to what is needed. I own, for example, a property in La Mesa. I am presently renting it out.
Since the exemption 'dies with me' (kids have their own lives), I have zero motivation to keep the property. So I sell.
Now there is one less affordable rental as property taxes have been raised significantly from what I am paying. It will be owner-occupied only.
However, let's say 'little susie', my daughter, decides to live in it. She has a health crisis in her old age and decides to rent the property in her last years. OOOOOPS, can't do that without a reassessment of the property taxes? Really?
If rental properties are inherited, they will be quickly sold as it is not financially feasible to run them.
How is this good for keeping housing affordable?
Thx,
Alan
OP here, got some legal advice from a lawyer. They recommended that the parents gift 100% of the property to the child before prop 19 takes in effect. So they would get the prop 58 exclusion. Of course there is the risk to the parent because they are relinquishing property now. But it is cleanest way to do this. Maybe there is other advice.
@Al Lee, put a 'death' clause in your rental agreements that voids them if the LL passes.
@Alice Chen, that's bad advice. It puts your kid on title today, which will cause a reassessment today.
I keep on coming back to the 'usage' part. It should not matter what the use is of a property. In other places the tax is the tax and you get a owner/occupant break if you are the owner and live there.
This is a bad law and you ppl in Cali got hoodwinked over the ppl impacted by wildfires.
@John Erlanger, I think there would still be a reassessment for half the value when the parent passes as it is a step up in basis for half the property.
I am not impacted, but my kids will be upon my passing. The property I own is a sfr. My ROI is much lower than my AZ properties. Add on a ton of property taxes & it's not worth keeping.
I doubt that I’m ‘unique’. There will be very few, if any, sfr rentals in the future with this law. And IF there are, the prices will be out of sight. I doubt it helps ‘affordability’.
Imagine when whole apartment complexes are inherited.😱
@John Erlanger, because that has been the law for the last 45 years. And those properties do not collect 'at market' rents. The prices are usually below market so they can attract long term tenants.
If you think rents are unaffordable now, come back in 5 years when some of these properties have turned due to being inherited.
An apartment complex, when inherited, will still be an apartment complex. It will be owned by the ultra-rich that can afford (for a time) the rise in property tax. EVENTUALLY that cost will be passed along to the tenant. It always is passed along.
A transfer of wealth TO the 1%.
Prop 13 was created to stop these type of situations where ppl get taxed out of their properties. I am beginning to wonder if you are a real estate agent, from California, or even understand Prop 13?
@John Erlanger, I believe there are maximums on gifts, then there are gift taxes. No way out. Just sign your property over to the state, one way or the other.
It’s the first nibble of many upcoming bites to prop 13. 😢
@John Erlanger, if you own any property in Cali, you benefit from prop 13. Your property taxes were based on your purchase price, whenever that was in time.
It benefits ALL landowners, not just the rich.
Let’s say you bought your house for 500k 20 years ago. Today it’s worth $1Mil. Your taxes are still lower than that person that buys a $1Mil house today.