Posted over 4 years ago

Prop 58 Loans – Proposition 58 in California to Save on Property Taxes

Prop 58 Loans – How do they work?

Prop 58 loans are available from specialized trust loan or probate and estate lenders. The loan is made directly to the trust or estate since the trust or estate is the current owner of the property. The trust or estate will be the actual borrower on the loan, not a beneficiary. The note and deed of trust are recorded against the property just like a traditional mortgage

When Prop 58 loans are funded, the loan proceeds go directly to the trust's or estate's bank account. Funds can then be distributed to the beneficiaries who are selling their interest in the property. After the beneficiaries have received their funds, title of the property can be transferred from the trust or estate into the name of the beneficiary who will own the property.

The title of the property is now in the name of the new owner which allows them to go to a traditional lender and refinance the short-term Prop 58 loan into a long-term loan. The Prop 58 loan could also be paid off with cash.

How Does Prop 58 work? What is Prop 58?

Proposition 58 is a California constitutional amendment which excludes property tax reassessments on property transfers from a parent to a child. Property that has been owned by a family for many years will have a relatively low annual property tax rate due to Proposition 13. Prop 13 limits property tax increases based on the market value when the real estate was purchased and limits the annual increase at 2%.

When property is transferred or sold, it is reassessed at current market value. This may cause a large increase in property taxes for property that has appreciated. Prop 58 prevents the real estate property taxes from increasing when the property is transferred from parent to child. The beneficiary will need to complete and file the Prop 58 application with the county assessor.

The beneficiary who owns the property going forward will keep the parent’s existing property tax rate and continue to keep property taxes low with Proposition 13.

Prop 58 – Prevent California Property Tax Reassessment for Inheritance Property

Prop 58 prevents property tax reassessments on inheritance properties that are transferred from parent to child. Prop 58 applies only to parent to child transfers. Proposition 58 reassessment exclusions are approved by the county in which the property is located. The form must be filed with the county after the inherited property has been transferred from parent to child.

Why are Prop 58 Loans needed?

1. Help divide an interest in inherited property between beneficiaries

When beneficiaries are dividing interest in inherited real estate, they often need to take out a loan so one beneficiary can buy out the others. The title of the inherited real estate is still in the name of the estate or trust. The beneficiaries are not on title of the property and this will prevent a bank or other traditional lender from providing a loan. Banks cannot lend to irrevocable trusts. A Prop 58 compliant loan gives the beneficiary the funds necessary to divide the interest the inherited property.

2. Preventing a sibling to sibling transfer

Personal funds from beneficiaries cannot be used to settle trust distributions and still obtain Prop 58. Even if a beneficiary has cash to buy out the other siblings, personal funds used to settle the distribution for the inherited property is not advised. Personal funds going from one sibling to another sibling will be seen as as a sibling to sibling, not a parent to child transfer. Only parent to child transfers are eligible for Prop 58 (grandparent to child for Prop 193).

Consult a trust or estate planning attorney prior to proceeding with a trust or estate distribution.