California Proposition 19, also known as “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act”, went into effect on April 1 st , 2021.
When Proposition 19 took effect, it replaced Proposition 58, which previously
controlled how a person inheriting a home from a parent could avoid property tax
reassessment. Under the newly passed Proposition 19, a few of the rules for obtaining an exclusion from reassessment have changed substantially for some.
Previously under Proposition 58, a child inheriting a home from a parent could apply for an exclusion from property tax reassessment with no value limitation, providing it was a primary residence. They could also keep an investment property with a 1 million dollar exclusion per parent. Under Proposition 19, there is a limit of the current taxable value plus $1,000,000 on a primary home. Proposition 19 eliminated the ability to avoid reassessment on an inherited home that is not your primary residence.
There are additional requirements when it comes to receiving an exclusion from reassessment on an inherited home.
When you are dealing with administration of a trust or estate and the real property is the primary asset with little to no cash in the trust there are still options to equalize the distribution.
A trustee who elects to make a non-pro rata distribution may equalize the value of the other beneficiaries’ interests in the trust assets by encumbering the real property with a loan and distributing the loan proceeds to the other beneficiaries. The equity left in the property must match the cash amount the other beneficiaries are receiving. The key for the Assessors is to show that everyone receives their equal share according to what the trust states.
However, a loan cannot be made to the trust by any of the beneficiaries who intend on keeping the real property. Doing so would be considered a sibling-to-sibling buyout resulting in a transfer between beneficiaries rather than a transfer from parent to child, which would disqualify the transfer from the parent-child tax reassessment exclusion.
For example, if there are multiple child beneficiaries inheriting assets from a parent and one of those children would like to keep the family home, an equal distribution of assets must be made. So if the only asset in a trust was a home worth $600,000 and one of the three child beneficiaries wanted to keep that home, a loan would need to be made to the trust for $400,000. In this situation the two beneficiaries who did not want the home would receive their $200,000 cash and the other child receives the home with $200,000 equity in it.
When there are insufficient cash assets for an equal distribution to be made from an irrevocable trust, a person will often require the assistance of a trust and estate lender.
As documented by the California Board of Equalization, the acquiring beneficiary may not utilize their own funds or make a personal guarantee on the loan. Doing so would create a sibling-to-sibling buyout and would disqualify them for the parent to child transfer exclusion.
The loan will need to be made directly to the trust. A trust and estate lender will make a loan directly to the trust, providing enough cash for the equalized distribution to be made. The trust lender often works directly with an attorney or property tax consultant. A trust loan is typically a short term loan with no pre-payment penalty. Once the property has been transferred from the trust to beneficiary, the loan can be paid off or refinanced into a conventional mortgage.
Additional information is available on the California Board of Equalization website located here, and remember, when it comes to Real Estate…Pat Rocks!