Inheriting a Home in California? Here’s What You Need to Know

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Adhiti Bandlamudi | Contributor

If you’re expecting to inherit a home in California, you might need to find a “for sale” sign. That’s because Proposition 19 has made it much harder to keep that house.

Before the proposition narrowly passed in 2020, parents could pass down their home and their very low property tax rate to their children. But Proposition 19 changed that. Now, the property’s value gets reassessed at the time of transfer, and the property taxes could rise along with it. It’s confusing for some who can’t decide whether they should sell or keep their newly inherited property.

For many people in California, inheriting a home their parents bought decades earlier — when the cost of housing was much more affordable concerning average salaries — is the only way they’ll be able to own a home. If you’re in this situation, keep reading for some factors to consider:

Do you plan to live in the house you inherit?

There are some benefits for people who choose to make an inherited property their primary residence. If you plan to live in the inherited home, you can apply to have up to $1 million excluded from the tax reassessment as long as you move into the home within a year of the transfer.

Despite those benefits, there are some downsides, said Alicia Gamez, an attorney specializing in California taxation law, estate planning, trust and probate law. If a family’s home is a multi-unit building, where the parents live in one unit while their children live in other units, only the parents’ unit will qualify for a reassessment exemption. The other units, where the children live, would get reassessed.

“I have seen circumstances where the property tax reassessment really threatens a family’s ability to stay in their neighborhood,” Gamez said.

Gamez said situations can differ based on the circumstances of families. If the home requires repairs, those can add up, and deciding to live in the home is even more expensive and complicated. If siblings are involved, selling and splitting the money may be easier than having one sibling buy out the others.

If the children already own a home, they might not want to move. In that case, they can choose to sell the inherited property or rent it out.

Do you plan to rent out the inherited house?

Rather than selling the inherited property, many inheritors chose to rent out the home and collect a passive income. Before Proposition 19 passed, the inheritors could keep the low property tax rate.

Some people called this the “Lebowski loophole” because the law allowed people like actor Jeff Bridges and his siblings to pay $5,700 in annual property taxes on the Malibu beach house his parents bought in the 1950s while renting it out for $15,995 a month.

Gamez said Proposition 19 also aimed to fix some of the “market anomalies” created by decades of unusually low tax rates.

“There were people in San Francisco who had real estate that was vacant, and it only cost them $600 a year in property taxes,” she said. “They chose not to sell it because it was an appreciating asset with very low overhead.”

With Proposition 19, she said, “It’s going to cost them tens of thousands of dollars to just hold it.”

Why was Proposition 19 passed in the first place?

Proposition 19, officially called the Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act, aimed to help people 55 years and older downsize from larger, single-family homes into smaller houses.

The California Association of Realtors lobbied in favor of the proposition and promised it would “open up tens of thousands of housing opportunities,” making the homes “more readily available for first-time homeowners, families and Californians throughout the state.”

Thanks to Proposition 19, people looking to downsize into a smaller home or condo can keep their low tax rate if they purchase a home of equal or lesser value.

Of the money generated through the increased property taxes this new law is expected to generate, 80% funds fire suppression efforts for local special districts and the rest goes to the State Department of Forestry and Fire Protection.

Is there a chance Proposition 19 will be overturned?

Some property owners across the state want to repeal Proposition 19 and bring the issue in front of voters, but the movement is still small.

Kern Singh, an attorney who specializes in estate law, said some of his clients considered transferring their property to their children immediately, rather than waiting for the property to increase in value, as a way to maintain a lower tax rate. But he said he’s urging those clients to wait and see what happens with Proposition 19.

“I’m a real estate investor myself, and I haven’t taken any drastic measures,” he said. “I’m waiting to see how this pans out in the long run.”

Gamez is a bit more skeptical about any repeal effort, especially as more people purchase homes in California and pay steep property taxes, often for older properties.

“I think that for every person who has a super low property tax basis, they have several neighbors who do not,” she said. “Are those neighbors going to vote to let their neighbor keep their 1979 property tax basis? I think there are a lot of people who feel significant resentment towards having not been born here in the first place.”

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