New Property Tax Law Affects Estate Planning

California voters recently passed Proposition 19. The new law goes into effect on February 16, 2021, and may impact your estate planning goals.
Prior to Prop 19, a parent could leave their real estate (up to $1,000.000.00 in value) to a child or children, and there would be no property tax reassessment at the parent’s death. In other words, if the parent paid low California property tax, the child could inherit the house and other real estate up to this limit, and also pay the same low property tax rate as the parent. This was called the “parent-child exclusion”. Adult children often used the inherited real estate for rental property income, since the inherited home was typically mortgage-free, and had low property taxes.
Prop 19 drastically limits the availability of the parent-child exclusion. Under the new law, the inherited property will now be reassessed at the parent’s death, so the inheriting child must pay increased property taxes, which can be massive. One exception: if the inheriting child uses the residence as their own principal residence, the property will not be reassessed.
Inheriting real estate has been a huge financial benefit to adult children, often trying to retire themselves. The thought of rental income has been very attractive, but now due to Prop 19, the tax costs associated with inherited property has increased substantially, making the rental option not as attractive.
Estate planning involves tax considerations, court avoidance, and many other issues. The McNamara Law Firm is committed to helping our clients understand and choose their best options.
For an appointment, please call the McNamara Law Firm, P.C. at (661) 287-3260, or visit www.theMcNamaraLawFirm.com.