[In 2020, Californians passed Proposition 19, which changed our property tax law. Advocates for Prop. 19 publicized the benefits for homeowners aged 55 and older (among others) who would be able to transfer their current property tax assessed value to a replacement home. There was virtually no mention of the fact that Prop. 19 would make it more expensive to inherit property.
Prior to Prop. 19, if you inherited property from a close relative (a parent, grandparent, or sibling), you also acquired the property’s assessed value. Thanks to a 1978 amendment to the California Constitution (Prop. 13), California property taxes are limited to 1% of the assessed value with annual increases not to exceed 2% per year.
So, if your parents bought a home 50 years ago for $150,000, today they’d pay about $4,500 in annual property taxes. If they passed away and bequeathed the home to you, before Prop. 19 your property taxes would remain at about $4,500, regardless of the fact that the fair market value of that home is now close to $3 million. Your taxes would be unaffected whether you moved into that home or not.
Prop. 19 changed this. Now, if your parents bequeath that same home to you and you do not move into it as your primary residence, the assessed value becomes the fair market value, and your property tax bill skyrockets from $4,500 to about $30,000 per year. If you choose to move into your parents’ home and make it your primary residence, you can deduct up to $1 million from the fair market value and that becomes the new assessed value.
Going back to 1978, Prop. 13 was a bad idea. It created a situation where people who own similar homes can pay wildly different property taxes. If I lived in a subdivision where my house were all but identical to the house next door, my neighbor and I would probably benefit from the same government services funded by property taxes. If one of us bought our home 35 years ago and the other bought theirs last year, one of us would pay about $800 per year in property taxes, and the other would pay closer to $5,000 per year. That’s not a fair system. Without increasing the overall tax dollars collected, California should create a tax assessment system that charges both me and my neighbor the same amount. When property taxes are based on fair market value, everyone pays equitably for the services we receive.
Okay, stepping off my soapbox now.
Be aware that anyone can appeal the assessed value of their property at any time. If the assessed value is higher than the market value, you can likely get it changed. It’s best to appeal right away and have the change to the assessed value apply to the base year, because property tax increases are limited to 2% per year from the base year. However, even now it would be worthwhile for some property owners in the Ukiah Valley to appeal their property’s assessed value. The value of both grapes and cannabis have dropped dramatically in recent years, and correspondingly, agricultural land that would work support vineyards and grows has also dropped in value.
Premier vineyard property with mature grapes planted for machine harvesting was selling for as much as $50,000 per acre a few years ago. Now, it’s closer to $25,000 per acre. If I owned a vineyard, I would head over to the Assessor’s Office and make my case. The process to lower your property’s assessed value does not necessarily require a court hearing. If you and the assessor agree, the assessor can make the change. If you cannot come to an agreement, you can appeal to the Mendocino County Tax Assessor’s Appeals Board. If you disagree with them, you can appeal to a judge.
For people who inherit property and choose to sell, either because they cannot afford the property taxes or for other reasons, there’s good news. For capital gains purposes, inheriting property still comes with a stepped-up basis. So, if your parents purchased their home for $150,000 and then completed $50,000 worth of improvements, their income tax basis would be $200,000. When you inherit the property, your basis is stepped up to fair market value. In our example above, that would be $3 million. So, if you sell the property, you do not have to pay capital gains tax on the $2.8 million profit.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.
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