Connecting Real Estate to Your Estate Plan
California Proposition 19 has changed the Rules for Property Tax Transfers. Proposition 19 is a California constitutional initiative that changed the rules for property tax transfers. Many California voters do not understand the trade-offs in this law.
• It allows homeowners who are over 55 years of age, disabled, or victims of natural disasters to transfer their existing property tax base to a replacement home within the state (including a more expensive home).
• HOWEVER, Prop 19 also significantly limits existing Prop 13 property tax benefits for real estate transfers between family members. The parent-to-child or grandparent-to-child exemption is eliminated unless the child actually lives in the inherited home as a principal residence. Even if then, they would only get the first million dollars of increase in value excluded from reassessment and anything above that still gets reassessed.
• In other words, children inheriting a home from their parents now face an increase in property taxes based on current market value of the home rather than inheriting the parent’s Prop 13 tax base. For example, a $2.5 million dollar home’s annual property tax could go up by over $15,000.
• For non-residences, like rental properties, it’s even worse. There’s no exclusion from reassessment at all.
• This is a good time to consult professional advisors to learn of any tax strategies and options that could be appropriate to help ensure your estate goals are maximized.
Step Up Basis Changes
• A new IRS revenue ruling pertaining to the transfer of assets to an irrevocable trust (such as one designed for Medicaid) might carry an unpleasant surprise for a trust’s beneficiaries. Property, such as your home, held in an irrevocable trust ‘that is not included in the taxable estate at death’ will no longer receive a step-up in basis. So anyone using an irrevocable trust should be reviewing their estate plan with their professional advisor to make sure it complies with the updated IRS rule and preserve the step-up in basis for assets that the trust will pass on.