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.
@John Erlanger, rental property in Cali is generally a negative cash flowing proposition. You’d have to put down more than 50% for any positive cashflow. Your only return is appreciation. That’s not called investing, it’s called speculating.
Why would you want to make rentals more scarce & pricey?
The only thing I am confused about is if 2 parent and an adult child are both on the grant deed of a rental house, if the 2 parents die, does the adult child still get the original low taxes?
In this case, is adult the child considered an original owner and not subject to reassessment?
So when the last remaining parent dies, even if the adult child is on the deed, the taxes get reassessed to a higher level?
1. So if Dad dies, does Mom inherits Dad portion as she is the spouse? So she owns 67% and I assume she is not reassessed as a spouse. Adult child's 33% portion is assessed or not at that point?
2. When Mom dies, adult child inherits 67% portion from the parents and his original 33% portion so now is the sole 100% owner. Does he get reassessed at that point?
I went through several assessor websites but couldn't find this situation when all 3 are on a deed.
So to summarize:
1. Does the adult child get step up basis on the 67% he inherited? The 33% he originally owned in NOT step up.
2. So when both parents are dead, the city assessor will assess the 67% that the child inherited now to market value. If the house is valued at $2m fair market value, then the parents 67% share was $1.3 million. So at 1% property tax, that is $13,000 is property tax. That $13K is added to his tax.
Am I thinking about this correctly?
So to summarize:
1. Does the adult child get step up basis on the 67% he inherited? The 33% he originally owned in NOT step up.
2. So when both parents are dead, the city assessor will assess the 67% that the child inherited now to market value. If the house is valued at $2m fair market value, then the parents 67% share was $1.3 million. So at 1% property tax, that is $13,000 is property tax. That $13K is added to his tax.
Am I thinking about this correctly?
I think that this is the law if the titling had the first parent that passes' interest go to the living parent. So then the living parent has 67% and child has 33%.
But if the child and spouse each inherits 1/2 of the first deceased parent's interest, say 17% each, then 17% of the property's value should be reassessed at that time---the child's share. Right?
Hi. I wrote down my thoughts about Proposition 19 in this blog post (https://blog.yonathan.org/post...). Basically you have to transfer an investment property to a child by February 15, 2021 (before Proposition 19 becomes effective) to be excluded from a “change in ownership”. But then you lose the step-up in basis, and if it’s a gift then the child will owe capital gains taxes when he sells. One possibility to reduce capital gains taxes would be to sell the property to the child at fair market value with seller financing (which I heard of on the Real Estate podcast e.g. https://www.biggerpockets.com/...).
But I’m not sure how selling to a child in installments interacts with the parent’s mortgage. Can you can sell a property to a child in installments if you already have a mortgage, or do you have to refinance in both your and your child’s name first? Is it possible to get a loan for repairs after signing a seller financing agreement, or do you have to pull out all the cash you need beforehand?
Only in California would someone ask this question: what does it cost to be placed on life support? Or in a cryogenic pod? If I never actually die, then there is no reassessment. Just kidding.
This proposition fooled a lot of people. Maybe its time to change professions and become a professional ambulance chaser (I.e., a realtor). Kidding again.
@Yonathan Randolph On your blog, you mentioned if parents add the adult child to the deed now so each person owns 1/3, then when the parents die (67%) ownership, then the 67% gets reassessed, but not the 33% owned by the child?
I thought if there is a reassessement for the whole property (when the parents die) as the parents are "original" owners, while the child is a "not original" owner.
@Alice Chen, no, I meant that if the property is already assessed at over $1 million, then only the first $1 million of transfer is excluded from change in ownership under Proposition 58 if you do it by Feb 15, 2021, and so you can transfer whatever percent that adds up to $1 million of assessed value.
I think you are describing a joint tenancy, in which the “original transferors” are treated as the owners under Proposition 13 and 100% of the property is transferred to the “other than original transferors” when the “original owners” die (basically, creating a joint tenancy to add a child is treated similar to a will) (BoE rule 462.040 https://www.boe.ca.gov/proptax...). I didn’t discuss this at all. You’re right that the 100% transfer when the “original transferors” die will cause reassessment to fair market value if the property is not a “family home” of the parent and children due to Proposition 19.
Here are some more ideas in this webinar by Gina Lera (https://capfamilybus.org/webin...). She suggests intentionally defective irrevocable trusts as a way to to a change in ownership under Proposition 19 but that don't transfer the property yet according to capital gains taxes. Or to put the property into an LLC and give minority ownership to each child.
I just got an email from an attorney saying they can create a "specialized irrevocable trust" which would help keep the low tax basis. It would cost though a few thousand dollars. Thank you
I had a discussion with a Legal Analyst, Estate Planning Attorney and Financial Planner to get their input on Prop 19. Here's a recording of our discussion!
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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.
Flip side to that coin: If the parents gift the property, it will have their carryover income tax basis. If the property has appreciated since purchase, the transfer may result in a large capital gains tax when the children later sell the property. The gifted property will not receive a step-up in income tax basis to fair market value, which the children would have received had they inherited the property. Depending on the size of the parents’ estate and the property value, the desire to minimize income tax may outweigh the property tax savings, especially if the property will be sold after the parents’ deaths.
I hope everyone is enjoying the Holidays!
Here is an informative video on Prop 19 from attorney Paul Horn. https://www.paulhornlawfirm.co...
@Account Closed, great idea! If you get a petition going, please share a link here.
@Lynnette E., thank you so much for sharing that story. It shows a lot of lessons that I picked up on. I appreciate it. So sorry for the heartache and hardship you went through, just know that your story is providing hope and an education for others on here!
My question is will an LLC help mitigate reassessment if the children are shareholders?
@Account Closed, great idea! If you get a petition going, please share a link here.
@Lynnette E., thank you so much for sharing that story. It shows a lot of lessons that I picked up on. I appreciate it. So sorry for the heartache and hardship you went through, just know that your story is providing hope and an education for others on here!
My question is will an LLC help mitigate reassessment if the children are shareholders?
I do not know about LLC's. I use Trusts as the tax and filing situation for me is much better than a LLC. And I do not partner with anyone.
Update to Prop 19 From Howard Jarvis Group. Please read and help if possible...
The Howard Jarvis Taxpayers Association sent out this news
release today following the defeat of SCA 4 in the Senate
Governance and Finance Committee. If you are interested in
volunteering to help collect signatures to get the "Repeal the
Death Tax" initiative on the ballot, please visit
www.RepealTheDeathTax.com ... sign up to volunteer.
We'll be filing the initiative soon, and signature collection will
begin when the measure is approved for circulation, which
takes about two months. Thank you! ___________________________
For immediate release
May 10, 2023
HJTA announces initiative to “Repeal the Death Tax”
reassessment to market value.
The Howard Jarvis Taxpayers Association, California’s
leading taxpayer advocacy group, will go forward with an
initiative to restore the right of parents to transfer their home
and limited other property to their children without
The announcement follows the 3-4 vote in the Senate
Governance and Finance Committee Wednesday to defeat
Senate Constitutional Amendment 4, authored by Sen. Kelly
Seyarto, R-Murrieta, which aimed to reverse the provisions
in Proposition 19 regarding intergenerational transfers of
family property. Under Prop. 19, which passed narrowly in
November 2020, property is now reassessed to market
value upon transfer between parents and children, with
limited exceptions.