Understanding Prop 19: How to Preserve Mom’s Low Property Taxes When Inheriting a Home in LA

Inheriting a home can be both a blessing and a challenge, especially when it comes to understanding property taxes. For many adults in Los Angeles, recent changes from Proposition 19 (Prop 19) have created confusion about how to keep the low property tax rates that their parents enjoyed. This blog post will clarify what Prop 19 changed, provide examples of common inherited property scenarios, outline potential pitfalls, and present planning strategies families can consider before a loved one passes away.

What Changed with Prop 19?

Prop 19, effective February 16, 2021, significantly changed property tax rules in California. Before Prop 19, children could inherit their parents' homes and retain low property tax rates, regardless of market value. Now, however, new regulations limit this benefit.

The parent-child exclusion permits the transfer of a primary residence without reassessment only if the child moves into the home within one year of the parent's death. The house must also serve as the child's primary residence. If the property gets rented or sold, it will be reassessed at market value, potentially leading to a substantial tax increase. For instance, if the home’s value goes from $500,000 to $1 million, the taxes can increase dramatically, sometimes by hundreds or thousands of dollars.

Common Scenarios for Inherited Properties

Scenario 1: Child Lives in the Home

If you inherit your parents' home and decide to move in, you can benefit from the parent-child exclusion. Doing so allows you to retain your mom's low property tax rate, as long as you occupy the home as your primary residence within one year of her passing. For example, if the home was taxed at $3,000 per year, you can continue paying that amount instead of facing a reassessment that could push taxes to $6,000 or more.

Scenario 2: Child Rents or Sells the Home

Choosing to rent out the inherited property or sell it changes the situation. The property will be reassessed at current market value, which can lead to a significant spike in property taxes. For instance, if you inherited a property worth $750,000 and chose to rent it out, you may find yourself facing property taxes based on the market valuation, potentially exceeding $12,000 annually depending on local rates.

Pitfalls to Avoid

One major pitfall with Prop 19 is the risk of unexpected reassessment surprises. Missing the one-year occupancy deadline means losing the low property tax rate. Additionally, renting out the property may trigger a reassessment that considerably increases your tax burden.

Another frequent issue is a lack of awareness about the necessary forms and timelines for claiming the parent-child exclusion. Failing to file the right paperwork with the county assessor can lead to reassessment issues, complicating your financial situation later.

Important Timelines and Forms

To take advantage of the parent-child exclusion under Prop 19, prompt action is essential. Here’s what you need to know:

1. One-Year Deadline: Occupy the inherited home as your primary residence within one year of your parent's death to qualify for the exclusion.

   
   

2. Form Filing: Submit a "Claim for Reassessment Exclusion for Transfer Between Parent and Child" form to the Los Angeles County Assessor's office.

   
   

3. Documentation: Provide necessary paperwork that proves your relationship to the deceased and your occupancy of the property, such as a death certificate and legal identification.

   
   

Planning Ideas Families Explore Before Death

To handle the complexities of Prop 19, families often explore various planning options beforehand. Here are common strategies:

Trust Structuring

Setting up a trust is an effective way to manage inherited properties. A properly structured trust can help avoid reassessment if it meets specific conditions. Working with an estate planning attorney ensures that your trust is structured properly.

Occupancy Planning

If you plan to inherit property, consider your living arrangements ahead of time. If you intend to move into the home, ensure this happens within the one-year requirement to maintain low property tax rates.

Gifting Tradeoffs

Some families opt to gift the property before death to bypass reassessment. However, this method comes with trade-offs, like potential gift taxes and losing the step-up in basis, which significantly impacts capital gains taxes when the property is eventually sold.

Essential Checklist for LA County

To help navigate the process of inheriting a home in Los Angeles County, here’s a practical checklist:

• Confirm the property is your parent’s primary residence.

• Decide whether you will occupy the home, rent it out, or sell it.

• File the "Claim for Reassessment Exclusion for Transfer Between Parent and Child" form within one year.

• Gather necessary documents (death certificate, proof of relationship, etc.).

• Consult an estate planning attorney about trust structuring and primary strategies.

  
  

Common Questions

Does a trust avoid reassessment?

Yes, a trust can avoid reassessment if it meets certain guidelines under Prop 19. Consulting with an estate planning attorney is crucial for proper structuring of the trust.

What if siblings co-inherit?

When siblings co-inherit a property, they need to manage the inheritance collectively. If one sibling occupies the home, they can retain the low property tax, but others may face reassessment if the property is rented or sold.

Can we appeal an assessment?

Yes, if you believe the property assessment is incorrect, you can appeal through the Los Angeles County Assessor's office. Be prepared to provide relevant evidence supporting your claim.

Final Thoughts

Inheriting a home in Los Angeles can be complicated, especially with the changes introduced by Prop 19. Understanding how this legislation impacts adult children is essential for preserving their parents' low property tax rates. By recognizing the common scenarios, potential pitfalls, and planning strategies, families can make informed decisions that benefit them in the long term.

If you have questions about your specific situation or need assistance navigating the complexities of Prop 19, consider scheduling a consultation with our estate planning law firm. We can help you evaluate your property and explore the best options for preserving your family's financial legacy.