Imagine inheriting your family home—a place filled with cherished memories—only to discover that the property taxes have skyrocketed. Changes in California property law, specifically Proposition 19, have left many homeowners wondering how to manage inherited property without facing a financial burden.
At Blacksburg Law, we’ve guided many families through the legal and financial challenges tied to estate planning and inherited property. Today, we’re diving into the impact of Proposition 19 on California homeowners and offering practical insights to help you make informed decisions.
Proposition 19, which started on February 16, 2021, changed how inherited properties are taxed in California. It updated the rules for property tax reassessment, especially for properties passed from parents to children.
Understanding these changes is critical when planning your estate or managing inherited property. Let’s break it down further:
When you inherit a property, it’s usually reassessed based on its current market value. This often leads to much higher property taxes, making it hard for many families to afford to keep the home.
The traditional tax break for parent-to-child property transfers isn’t automatic anymore. Now, stricter rules apply, especially if the inherited property isn’t used as the heir’s primary home.
To avoid a tax increase, children who inherit a property must make it their main home. If they don’t, the property taxes will be based on its full market value.
Even if the heir moves into the property, the tax break only applies to the first $1 million over the original assessed value. For example, if the property was originally assessed at $500,000 and is now worth $1.8 million, only $1.5 million is protected from reassessment. The rest will be taxed at the higher market rate.
Rental properties and second homes are fully reassessed, often making them too expensive to keep in the family.
Estate planning tools like trusts play a crucial role in managing the impact of Proposition 19.
When a revocable trust becomes irrevocable, usually after the grantor passes away, it counts as a change in ownership. Under Proposition 19, this can trigger a property tax reassessment unless the beneficiary meets the new eligibility rules.
The date of transfer for tax purposes is critical in irrevocable trusts. It’s essential to understand how this timing interacts with Proposition 19 rules to minimize tax liabilities.
The changes brought by Proposition 19 highlight the importance of revisiting estate plans. Strategies like qualified personal residence trusts (QPRTs) may offer opportunities to manage tax implications effectively.
Proactive planning is the key to reducing the financial impact of Proposition 19 on your estate. Here are some strategies to consider:
Establishing trusts, particularly revocable living trusts, can help maintain property tax benefits and provide flexibility for your heirs.
Gifting property while you’re still alive can help your heirs keep the lower tax rate, as long as they use the property as their main home.
There are limited exceptions under Proposition 19, such as for family farms. If applicable, these can help reduce tax burdens.
Other estate planning tools, like partnerships or limited liability companies (LLCs), might also be useful depending on your circumstances.
An estate planning attorney can help make sure your plan follows Proposition 19’s rules and avoids potential issues.
Proposition 19 has reshaped the rules for inheriting property in California, making it more important than ever to have a clear, well-structured estate plan.
At Blacksburg Law, we’re here to help you understand your options and make the right decisions for your family. Whether you’re inheriting property or planning for the future, we’ll work with you to protect your assets and create a plan that aligns with your goals.
Contact us today at 415-508-5600 or visit our contact page to schedule a consultation.
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