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Tax, SDIRAs & Cost Segregation

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Toby Copeland
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Avoiding Property Tax Reassessment

Toby Copeland
Posted Apr 13 2024, 13:01

Hello All,

This is my first post and it’s a doozy.   My Father in law purchased his home back in the 80’s.   It’s in California and the tax basis is quite low.   The home is owned in a Trust and his 4 children are the beneficiaries of the trust.   Sadly the home was badly damaged in a fire, fortunately nobody was hurt.   He did get some money from Insurance, but not enough to properly facilitate a quality rebuild.   He wants to give the house to the 4 children and 2 of the children are willing to contribute added capital to improve the house so that Dad can live there for the rest of his life, he is currently 80 years old.   Our idea is to convert part of the home to a Jr Adu and get rental income that will offset the expenses for dear dad and let dad live rent free.   The house is owned outright with no mortgage.  

Our big question Is how do we keep the low property tax basis? We would like to own the property in an LLC so that the 4 kids can have 25% ownership each, and so 2 kids that have funds can loan $ to the LLC to facilitate the rebuild. Can the LLC buy the property for current value to keep the low property tax basis? The current tax basis is $300k annual, and because it is badly fire damaged a fair market value before rebuild is approx $600k. Post build the value should be $1.2m or more.

I know that there is a lot of unpack here, but it seems a shame to have to pay property taxes on the higher value when Dad will still be the main resident for the balance of his life.   Is there another option that the kids should consider?

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Ellis San Jose
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  • Westlake Village, CA
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Ellis San Jose
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  • Westlake Village, CA
Replied Apr 13 2024, 13:59

Read up on Prop 19. 

I'm not an attorney or CPA, so consult them before you proceed. You can keep your Dad on title so taxes don't change while he is alive. Reassessment occurs when there is a change of ownership. Consider holding in a trust where you dad is sole beneficiary while he is alive. Upon the death of your father it passes to the 4 children via the trust. 

The 2 beneficiaries can secure & record a lien on the property for their monetary contributions to balance out the percentages of ownership upon inheritance. 

Beneficiaries should get a stepped up basis upon the death of your father if you don't transfer title to bene's before his death.

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Replied Apr 13 2024, 14:55

You need a California expert. I can only tell you what I’ve heard. One of the kids will have to make it their primary home when he passes to keep the low property taxes. As mentioned, as long as he lives there you SHOULD be ok. BUT, if you build another structure, all bets are off. 

Talk to the county taxing authority and a local real estate attorney/professional. If you screw up there’s no going back and you will be screwed every year going forward until you sell. 

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Dan Heuschele
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Dan Heuschele
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Replied Apr 13 2024, 17:26
Quote from @Ellis San Jose:

Read up on Prop 19. 

I'm not an attorney or CPA, so consult them before you proceed. You can keep your Dad on title so taxes don't change while he is alive. Reassessment occurs when there is a change of ownership. Consider holding in a trust where you dad is sole beneficiary while he is alive. Upon the death of your father it passes to the 4 children via the trust. 

The 2 beneficiaries can secure & record a lien on the property for their monetary contributions to balance out the percentages of ownership upon inheritance. 

Beneficiaries should get a stepped up basis upon the death of your father if you don't transfer title to bene's before his death.


 This response is near perfect.  Keep property in your dad’s name.  Prop 19 I believe will allow rebuild without triggering any reassessment of value.  

At death (which hopefully your dad has many great years left) the property will get a stepped up basis so there will not be any gain taxes.  

If at that time a child wants to move into the property as their primary residence they will be able to keep the reduced property tax basis.  If not, the property tax will increase to time of death valuation. Note the property tax being reassessed at death was a consequence of prop 19.  The same prop that allows you to rebuild without any increase in prop tax basis. There is a push to try to reverse the prop 19 clause that dictates prop tax being reassessed except primary to primary.  Currently this clause means that most inherited property has to be sold.  This includes family vacation homes, business property, etc.  

consult a tax professional to make the most informed decision.  They should be knowledgeable of prop 19, prop 13, and reassessment at death for both gains purpose and property tax purpose). 

Good luck

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Katie Balatbat
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  • San Diego, attorney
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Katie Balatbat
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  • San Diego, attorney
Replied Apr 15 2024, 08:19

@Toby Copeland

Yes, definitely a doozy. There is a lot going on and tons of competing considerations. Property taxes are one concern, and then you have possible gift tax, estate tax, and income tax considerations all swirling around at the same time. When you add that to possible LLC laws and rules, as well as trust/probate rules, there's a lot to consider at once. I see that you're also in San Diego, so feel free to reach out to me by private message if you want to chat further. You'll likely want to start with reviewing the requirements under Prop 19 for retention of the base assessed value when adding a child to title, and also look up the rules for a basis step-up at death. You may also want to review the rules for property tax reassessment while title to real property is held within a business entity like an LLC, as the rules are different than when title is held by an individual or trust.

*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.