Watch our brief video here; scroll down for the complete article…
We have written extensively on the negative impacts of proposition 19, effectively a “death tax” on inherited real estate. Those who choose to sell their inherited property are not immune from this new tax. In fact, a surprise bill is likely awaiting unwitting sellers caught off guard by this new tax, often received months after a sale is concluded.
Simply put, absent an exclusion (see below and our detailed additional information on Prop 19, here, for potential exclusions), an inherited property is subject to reassessment as of date of death. If the property is sold to a third party prior to the Assessor being notified of the death (which is often the case), then the Trust, Estate and/or the Beneficiaries will receive the supplemental assessment and any escape assessments from the date of death until the date they sell the property. These bills would be issued as unsecured. Thus the Assessor cannot charge the bill against the new owner, but will remain in the public records until paid in full. The Assessor CAN seek collection of this bill from the seller(s), i.e. the Trust, Estate and/or its beneficiaries.
Now that Prop 19 has been in place for just over two years, we are starting to receive more and more calls from beneficiaries and Trustees who receive supplemental property tax bills and/or escape property tax bills from their counties, often completely unaware these bills were coming, many of whom have distributed the estate proceeds and now must scramble to retrieve the funds to pay these bills.
Many escrow companies are not accounting for these additional taxes that will be due. Many realtors and even seasoned estate planning professionals are likewise failing to account for these additional taxes that will be due, resulting in a shocking bill for the Trustees, estate Executors and/or Beneficiaries.
Trustees and Executors beware, as the burden may fall on you to account for this tax. Here is some information that will assist and a formula to figure your new taxes.
DISCLOSURE / EXPLANATION
Here is an example of the disclosure we are providing to clients explaining this situation with a few examples…
California Proposition 19 Disclosure: Additional Property Taxes May Be Due Post Sale For Certain Inherited Properties, Review This Disclosure Carefully
California Proposition 19 made dramatic changes to inheritance of real property as it pertains to the annual property tax assessments. Additional property taxes may be due for some sellers post sale. While former Propositions 58 and 193 allowed children (or, in some cases, grandchildren) to ‘inherit’ the parent’s property tax basis, i.e. the ‘Prop 13 basis’, i.e. what they were currently paying in property taxes, due to Proposition 19, effective for all transfers (death, gift or otherwise) on or after February 16, 2021, most properties will be reassessed based on the full fair market value as of the date of transfer. In the case of a death, the date of death is considered the transfer date, even if the property is not actually transferred until sometime later. While there are some exceptions to this rule, a new ‘test’ is imposed to see if children (or, in some cases, grandchildren) will qualify for any exclusion; a strict timeline applies (generally, within one year of the death or transfer) and you must act timely to file for any applicable exclusion.
Additional information can be found on the State’s website at: https://www.boe.ca.gov/prop19/ or by contacting your County Assessor’s Office and/or a qualified real estate attorney.
For properties inherited by, gifted to, or purchased by, children or grandchildren, from their parents or grandparents, absent any exclusion timely filed with the county, Proposition 19 means that your county WILL eventually reassess your property, as of the date of death or transfer, based on the full fair market value at the time, and send a bill accordingly. In many cases, given that the County Assessor’s Office may simply be unaware of the death or transfer until after your subsequent property sale to a new party, the county will seek to reassess after the sale to the new party, sending a subsequent, increased, property tax bill in the form of a supplemental property tax bill and/or escape property tax bill.
CURRENTLY, AND WITHOUT AGREEMENT BETWEEN THE PARTIES OTHERWISE, MOST ESCROW COMPANIES ARE NOT WITHHOLDING FOR THIS ADDITIONAL POTENTIAL PROPERTY TAX ASSESSMENT. YOU SHOULD CONSULT A QUALIFIED REAL ESTATE ATTORNEY AND/OR YOUR COUNTY ASSESSOR’S OFFICE FOR ANY QUESTIONS PERTAINING TO PROPOSITION 19’S IMPACTS ON YOUR REAL ESTATE TRANSACTION AND IF YOU MAY BE ENTITLED TO AN EXEMPTION.
FORMULA TO FIGURE OUT YOUR NEW PROPERTY TAXES AND EVENTUAL SUPPLEMENTAL OR ESCAPE PROPERTY TAX BILL
As noted, due to Prop 19, as of February 16, 2021, if you transfer your property to your children (or, grandchildren, if the parents are deceased), via any means (gift, sale, hybrid, estate plan after your passing, etc.) that property will be reassessed to full market value for annual property tax purposes, absent an exclusion. (More information on Prop 19 and potentially qualify for the exclusion can be found on our Prop 19 page, link here.)
The new property taxes are based on the value as of the date of death. So this must be determined, i.e. what was the property worth on the date of death? A formal appraisal would be the gold standard (appraisers are frequently asked to ‘go back in time’ as to a property’s value on a past date); a Probate Referee’s opinion or Broker’s Price Opinion would be a good alternative; or you could simply figure this yourself with a good faith understanding of your local real estate market and comparable sales (but documentation would be key and of course a third-party’s opinion would carry more weight if ever contested).
Once you figure the new “fair market value” as of the date of death, then you simply review the current tax bill and do some math. Property taxes are 1% of the value, but check your current bill for potential add-ons such as local bonds and other local taxes and fees (sometimes on a flat rate, sometimes based on the value of the property). If you have the “fair market value” as of the date of death, simply use 1% of that as the ballpark, and ensure to account for other potential additional fees.
Depending on the value of the house, and what the parent(s) were paying, this could be a substantial difference, and will only continue to accrue until the date of sale. Thus a Trust or Estate that waits a year or longer to sell, would be faced with a year or more’s worth of additional property taxes based on that new value. This can easily get into the five-figure or even six-figure range depending on the property and length of time between the death and the sale.
Real Property Owner Angie died July 1, 2021. Her two children inherit the property via a trust or probate. Angie’s property taxes at the time of death were $1,000 per year. Angie’s property, at the time of death, was worth $3,000,000 (as determined by the county). The children do not qualify for an exclusion. Thus, the County Assessor’s Office will reassess the property based on the $3,000,000 value, i.e. to roughly $30,000 per year (presuming 1%, not including other bonds and taxes that may increase the bill further). This is a $29,000 annual increase in the property taxes. If the children do not sell the property until June 30, 2022, and are still paying the (earlier) $1,000 per year in property taxes, they will eventually receive a bill for the $29,000 Proposition 19 increase (i.e. an additional $29,000 per year due, for the 12 months Angie’s children held the property before sale).
Real Property Owner Bob died May 1, 2022. His child inherited the property via a trust or probate. Bob’s property taxes at the time of death were $10,000 per year. Bob’s property, at the time of death, was worth $2,000,000 (as determined by the county). His child does not qualify for an exclusion. Thus, the County Assessor’s Office will reassess the property based on the $2,000,000 value, i.e. to roughly $20,000 per year (presuming 1%, not including other bonds and taxes that may increase the bill further). This is a $10,000 annual increase in the property taxes. If the child does not sell the property until November 30, 2022, and is still paying the (earlier) $10,000 per year in property taxes, he will eventually receive a bill for the $5,000 Proposition 19 increase (i.e. an additional $10,000 per year due, for the six (6) months Bob’s child held the property before sale).
Real Property Owners Chase and Dorthy died January 1, 2022. Their children inherited the property via a trust or probate. Chase and Dorthy’s property taxes at the time of death were $5,000 per year. Chase and Dorthy’s property, at the time of death, was worth $30,000,000 (as determined by the county). The children do not qualify for an exclusion. Thus, the County Assessor’s Office will reassess the property based on the $30,000,000 value, i.e. to roughly $300,000 per year (presuming 1%, not including other bonds and taxes that may increase the bill further). This is a $295,000 annual increase in the property taxes. If the children do not sell the property until December 31, 2022, and are still paying the (earlier) $5,000 per year in property taxes, they will eventually receive a bill for the $295,000 Proposition 19 increase (i.e. an additional $295,000 per year due, for the 12 months Chase and Dorthy’s children held the property before sale).
Trustees and Executors beware, as the burden may fall on you to account for this tax – you should review this issue prior to final distributions and, absent a timely filed exclusion, funds should be withheld to account for these pending bills.
– Devin Lucas
Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individual and investors in residential real estate.
Lucas Real Estate – Attorney Devin Lucas and CPA Courtney Lucas – are experts in California intra family transfers using all aspects of Propositions 13, 58, 193, 60, 90 and new Proposition 19. Learn more about how Lucas Real Estate may help your family transfer by clicking here.
Questions? – Paid one-hour confidential legal consultations are conducted daily via Zoom and address virtually all questions, options, tax implications and strategies. (Book a consultation here.)
Lucas Real Estate
Real Estate Law | Real Estate Transactions | REALTORS®
lucas-real-estate.com | firstname.lastname@example.org | BRE No. 01912302
949.478.1623 office | 888.667.6038 fax
2901 West Coast Highway Suite 200
Newport Beach | California | 92663-4023
| Official Site | Blog | LinkedIn | Facebook | Yelp | Avvo | Twitter | Zillow |
California Board of Equalization: https://www.boe.ca.gov/prop19/
Orange County Assessor: https://www.ocassessor.gov/real-property-assessments/transfer-property-among-family
Related Articles: https://lucas-real-estate.com/proposition19/
The content on this blog is for informational purposes only. Nothing on this blog should be construed to be legal advice, and you should not act or refrain from acting on the basis of any content on this blog without seeking appropriate legal advice regarding your particular situation, from an attorney licensed to practice law in your state. The content on this blog is not guaranteed to be correct, complete, or up to date. Devin R. Lucas’ office is in Newport Beach, California and is only licensed to practice law in California. Please be advised that Devin R. Lucas only provides legal services or advice pursuant to a written legal services agreement. The content on this blog is not intended to, and does not, create an attorney-client relationship between you and Devin R. Lucas, nor does our receipt of an email or other communication from you. Some jurisdictions may consider this site to constitute attorney advertising; accordingly, please be advised this is an advertisement.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment).