Inheriting a home in California has always been a significant life event, often marked by both emotional and financial considerations. However, the landscape for inheriting property in the Golden State has changed dramatically since the passing of Proposition 19 in 2020. This new law has made it more challenging to retain inherited properties, especially for those who were banking on keeping the home within the family.
Whether you’re considering keeping the property, selling it, or renting it out, understanding the implications of Proposition 19 is crucial. Let’s break down what this means for you.
The Impact of Proposition 19 on Inherited Properties
Before Proposition 19, inheriting a property often came with the benefit of maintaining the original, lower property tax rate. Parents could pass their homes down to their children without triggering a reassessment of the property’s value. This meant that even as property values soared, the tax burden remained relatively low.
However, Proposition 19 changed the rules. Now, when you inherit a home, the property is reassessed to its current market value at the time of transfer, which can lead to a substantial increase in property taxes. This shift has left many inheritors with a difficult decision: should they sell the property or find a way to manage the new, higher tax obligations?
Should You Live in the Inherited Home?
For those who choose to make an inherited property their primary residence, Proposition 19 offers a potential tax break. You can apply to exclude up to $1 million of the home’s value from reassessment, but this comes with conditions. You must move into the property within a year of inheriting it to qualify for this exemption.
However, even with this benefit, challenges remain. Attorney Alicia Gamez, who specializes in California taxation and estate planning, highlights a common issue: if the inherited home is a multi-unit property where the parents lived in one unit and the children in others, only the parents’ unit is eligible for the reassessment exemption. The other units will be reassessed, potentially leading to higher taxes for the inheritors.
Additionally, if the property requires significant repairs or if multiple siblings inherit the home, the decision to keep or sell becomes even more complex. Selling and splitting the proceeds may be the most straightforward solution, especially if the new property tax burden is too high to manage.
Renting Out the Inherited Property: A Viable Option?
Renting out an inherited home can be a smart way to generate passive income, but Proposition 19 complicates this option as well. Under the new law, renting out the property typically triggers a reassessment, which can result in a steep increase in property taxes. This reassessment often erodes the financial benefits of renting, making it a less attractive option for many.
In the past, some high-profile cases—like that of actor Jeff Bridges, who rented out his inherited Malibu beach house for significant profit while enjoying low property taxes—highlighted what some called the “Lebowski loophole.” Proposition 19 was, in part, a response to these kinds of scenarios, aiming to address the market imbalances caused by long-standing low tax rates.
Why Proposition 19 Was Introduced
Proposition 19 was not solely focused on increasing taxes for those inheriting properties. The law was also designed to help older Californians, particularly those over 55, downsize from larger homes to smaller ones without facing a steep tax increase. This provision allows these homeowners to transfer their existing low property tax rate to a new, less expensive property.
The California Association of Realtors championed this proposition, arguing that it would free up larger homes for younger families and first-time buyers. In theory, this would create more housing opportunities across the state, although the real impact of this aspect of the law is still unfolding.
What’s Next for Proposition 19?
Despite the challenges it presents, Proposition 19 remains law, and any efforts to repeal or amend it are currently in their infancy. Some property owners are advocating for a reversal, but the movement has not gained significant traction.
Attorney Kern Singh advises his clients to proceed cautiously, suggesting they wait to see how Proposition 19 plays out over time before making any drastic decisions about transferring property. He notes that many are watching the situation closely, especially as more people purchase homes at current market values and are subject to higher property taxes.
In contrast, Gamez is less optimistic about the chances of repeal, pointing out that many Californians are frustrated with the disparities in property tax burdens between long-term owners and recent buyers. This sentiment may make it difficult to garner widespread support for reversing the proposition.
Conclusion: Making Informed Decisions About Your Inherited Property
Inheriting a home in California under the new rules of Proposition 19 requires careful consideration. Whether you plan to live in the property, rent it out, or sell it, understanding the financial implications is crucial. While the law presents new challenges, being informed and seeking professional advice can help you make the best decision for your unique situation.
Interested in learning more?
Kelly Perkins
949.310.3754
