5 ms·

Why the math on inheriting your parents' California home has changed

16 points by mikhael 3y ago

verall 3y ago
The way this article frames paying property taxes for your home at market valuation as an "effective inheritance tax" even though you can get a MILLION dollars in value exempted by living their as your primary residence for 1 measly year after inheriting the property really elucidates the issues with housing and property taxes in California.
- ZeroGravitas 3y ago
  To be fair to the analogy, most "inheritance taxes", while demonised relentlessly by certain groups, also have exemptions that other people would consider a lottery win.
- happytiger 3y ago
  Absolutely. It’s so lost on the author that the property tax system is distorting valuations in the first place that they don’t even examine it.
- jseliger 3y ago
  I read this: “If three siblings inherit a $1.5 million house from their parents, and only one of them wants to keep it, she will have to buy out the other siblings’ share for $1 million, which reflects the high cost of housing in the Bay Area,” Alisjahbana said. “It’s often not possible to buy out the siblings’ shares, so in this situation it’s common to sell the house.” My heart really goes out to the unfortunate people who inherit $500,000. Compared to those of us who inherit $0, their situation is so tragic.
  - tanseydavid 3y ago
    I don't think the article is asking for sympathy for anyone.
- YeBanKo 3y ago
  I know multiple people who inherited houses and has been sitting on it to avoid paying market-rate property tax. In my experience they also tend to be the shittiest landlords.
  - secabeen 3y ago
    Prop 19 was written to stop this, and it's good public policy.
- oceanplexian 3y ago
  In California a $2M house can be a fixer-upper 1950s ranch in a lot of areas. Areas that were average, working class neighborhoods when they were built. The person is often inheriting their childhood home. But they should have to sell the family home to a transplant techie, pay tens, or hundreds of thousands of dollars in taxes to a rent-seeking government, leave and move to Bakersfield to something?
  - thereisnospork 3y ago
    Yes. A person shouldn't be able to inherit approximately the median lifetime salary of an individual tax free because their parents happened to live in California. They've no more right to live anywhere than anyone else. If you want housing to be affordable, build housing until it is instead of trying to prop up pseudo feudualistic practices around hereditary land ownership to paper over the gross distinction of the housing market.
    - erkt 3y ago
      This is a wild take.
      - thereisnospork 3y ago
        Can you elaborate? Which part is 'wild'? That a person doesn't have a right to live where they'd like? This gets trotted out every time some might've been Californian complains about high housing costs. Or is it that inheritance should be taxed? Debatable I suppose but hardly 'wild'. The only problem I can see with the scenario is that the value on a 'fixer-upper 1950s ranch' is so high that the tax on it is beyond what an 'average working class' fellow or fellowette can reasonably expect to afford.
        erkt 3y ago
        An individual doesn’t stand to inherit the equivalent of a life time or labor because “their parents happened to live in California”. They stand to inherit it because their parents worked hard their entire lives and invested an obscene amount in a desirable market. They probably made significant sacrifices to do this. Many of our families were here long before real estate started getting out of hand and contributed to building the economic machine that makes California so desirable today. Newcomers absolutely deserve to pay higher rent and mortgage rates to live in the same place. They always had the freedom to invest in their own state or country.
- ctchocula 3y ago
  +1 to this. A fair and balanced take is that Prop 13 is a massive redistribution program from renters to the landowning class in California. In an ironic twist, the people without property are subsidizing the people with property. This is exacerbating wealth inequality.
everybodyknows 3y ago
Paywalled.
- setheron 3y ago
  I couldn't get web archive link to work either.
mavelikara 3y ago
> Under Prop. 19, the parents’ tax basis does not pass to the child. However, if the home is the inheritor's primary residence for at least one year after the property transfer, they can apply to have up to $1 million of the home's value not reassessed. If the home is worth more than $1 million, anything over that amount would be reassessed. Even with this exemption, inheritors are likely to see a substantial increase in annual property taxes, amounting to thousands or even tens of thousands of dollars, Button said. Kids inheriting property need to pay property taxes, just like their new neighbors. Move on please, nothing to see here.
- erkt 3y ago
  Trusts complicate this.
  - secabeen 3y ago
    Only slightly. Most trusts that hold homes dissolve and grant the property to the declared beneficiaries when the last trustor dies. The Rule Against Perpetuities means that all trusts must end within a specific time after the death of the last trustor; you can't have your parents put a house in a trust, inherit it at age 50, then keep it in that trust and live in it till you reach 100. The trust must be dissolved within the deadline, which makes it not worth even trying to extend it that way; the standard living trust that most people get dissolves and distributes the assets to the heirs when the second of the two parents dies.
PopAlongKid 3y ago
>Most heirs are not equipped to take on a tax bill that could potentially jump from $800 to $20,000 on the death of a parent, This is a misleading and extremely outlying example. No one in CA, even if they bought their house for $80,000 and never made a single capital improvement, still has only $800 property tax bill, because it goes up each year (just not as much as the market value). And to get an increase of $20K in property tax, the house would have to be worth $3,000,000, which is still far above the median. More importantly, the income tax benefit is orders of magnitude a bigger deal. Income tax on a $2,000,000 gain would be 23.8% federal at least, and probably well over 10% California (so about $650,000). Yet they will pay none of that, due to the basis adjustment to fair market value upon death of the owner(s). If the heirs can't figure out how to keep the house via a secured loan and their $650,000 in income tax savings, they probably have much more pressing money problems to deal with I imagine.
- pauldenton 3y ago
  So what is the Median house value in California? Or San Francisco which this SFChronicle article is from?
  - instagib 3y ago
    800k Cali. 1.3M SF.
    - appplication 3y ago
      1.3M would probably be property (including condo etc), not house. Though that is probably what the original asker intended.
- davidfischer 3y ago
  This isn't as crazy an example as you think. People and companies who bought properties before prop tax increases were capped in 1978 are paying almost nothing in property taxes. I live in California but not in the Bay Area in a house Zillow estimates at $1.2M. I have a neighbor in an admittedly smaller house that Zillow estimates at $740k. In 2022, they paid $482 dollars in property taxes on an assessed value of $34.5k. Whenever they sell, the new owner will pay 20x in taxes. Sites like Zillow show all of this and I can find multiple examples within a couple blocks of my house.
m463 3y ago
do people just put a home in a trust and avoid all this? I remember a friend bought a house, and the deed said <blah-blah> family trust.
- deleted 3y ago
  [deleted]
blotato 3y ago
...wish I had that problem.

16 points by mikhael 3y ago

The way this article frames paying property taxes for your home at market valuation as an "effective inheritance tax" even though you can get a MILLION dollars in value exempted by living their as your primary residence for 1 measly year after inheriting the property really elucidates the issues with housing and property taxes in California.

ZeroGravitas 3y ago
To be fair to the analogy, most "inheritance taxes", while demonised relentlessly by certain groups, also have exemptions that other people would consider a lottery win.
happytiger 3y ago
Absolutely. It’s so lost on the author that the property tax system is distorting valuations in the first place that they don’t even examine it.
jseliger 3y ago
I read this: “If three siblings inherit a $1.5 million house from their parents, and only one of them wants to keep it, she will have to buy out the other siblings’ share for $1 million, which reflects the high cost of housing in the Bay Area,” Alisjahbana said. “It’s often not possible to buy out the siblings’ shares, so in this situation it’s common to sell the house.” My heart really goes out to the unfortunate people who inherit $500,000. Compared to those of us who inherit $0, their situation is so tragic.
- tanseydavid 3y ago
  I don't think the article is asking for sympathy for anyone.
YeBanKo 3y ago
I know multiple people who inherited houses and has been sitting on it to avoid paying market-rate property tax. In my experience they also tend to be the shittiest landlords.
- secabeen 3y ago
  Prop 19 was written to stop this, and it's good public policy.
oceanplexian 3y ago
In California a $2M house can be a fixer-upper 1950s ranch in a lot of areas. Areas that were average, working class neighborhoods when they were built. The person is often inheriting their childhood home. But they should have to sell the family home to a transplant techie, pay tens, or hundreds of thousands of dollars in taxes to a rent-seeking government, leave and move to Bakersfield to something?
- thereisnospork 3y ago
  Yes. A person shouldn't be able to inherit approximately the median lifetime salary of an individual tax free because their parents happened to live in California. They've no more right to live anywhere than anyone else. If you want housing to be affordable, build housing until it is instead of trying to prop up pseudo feudualistic practices around hereditary land ownership to paper over the gross distinction of the housing market.
  - erkt 3y ago
    This is a wild take.
    - thereisnospork 3y ago
      Can you elaborate? Which part is 'wild'? That a person doesn't have a right to live where they'd like? This gets trotted out every time some might've been Californian complains about high housing costs. Or is it that inheritance should be taxed? Debatable I suppose but hardly 'wild'. The only problem I can see with the scenario is that the value on a 'fixer-upper 1950s ranch' is so high that the tax on it is beyond what an 'average working class' fellow or fellowette can reasonably expect to afford.
      - erkt 3y ago
        An individual doesn’t stand to inherit the equivalent of a life time or labor because “their parents happened to live in California”. They stand to inherit it because their parents worked hard their entire lives and invested an obscene amount in a desirable market. They probably made significant sacrifices to do this. Many of our families were here long before real estate started getting out of hand and contributed to building the economic machine that makes California so desirable today. Newcomers absolutely deserve to pay higher rent and mortgage rates to live in the same place. They always had the freedom to invest in their own state or country.
ctchocula 3y ago
+1 to this. A fair and balanced take is that Prop 13 is a massive redistribution program from renters to the landowning class in California. In an ironic twist, the people without property are subsidizing the people with property. This is exacerbating wealth inequality.

everybodyknows 3y ago

Paywalled.

setheron 3y ago
I couldn't get web archive link to work either.

mavelikara 3y ago

> Under Prop. 19, the parents’ tax basis does not pass to the child. However, if the home is the inheritor's primary residence for at least one year after the property transfer, they can apply to have up to $1 million of the home's value not reassessed. If the home is worth more than $1 million, anything over that amount would be reassessed. Even with this exemption, inheritors are likely to see a substantial increase in annual property taxes, amounting to thousands or even tens of thousands of dollars, Button said. Kids inheriting property need to pay property taxes, just like their new neighbors. Move on please, nothing to see here.

erkt 3y ago
Trusts complicate this.
- secabeen 3y ago
  Only slightly. Most trusts that hold homes dissolve and grant the property to the declared beneficiaries when the last trustor dies. The Rule Against Perpetuities means that all trusts must end within a specific time after the death of the last trustor; you can't have your parents put a house in a trust, inherit it at age 50, then keep it in that trust and live in it till you reach 100. The trust must be dissolved within the deadline, which makes it not worth even trying to extend it that way; the standard living trust that most people get dissolves and distributes the assets to the heirs when the second of the two parents dies.

PopAlongKid 3y ago

>Most heirs are not equipped to take on a tax bill that could potentially jump from $800 to $20,000 on the death of a parent, This is a misleading and extremely outlying example. No one in CA, even if they bought their house for $80,000 and never made a single capital improvement, still has only $800 property tax bill, because it goes up each year (just not as much as the market value). And to get an increase of $20K in property tax, the house would have to be worth $3,000,000, which is still far above the median. More importantly, the income tax benefit is orders of magnitude a bigger deal. Income tax on a $2,000,000 gain would be 23.8% federal at least, and probably well over 10% California (so about $650,000). Yet they will pay none of that, due to the basis adjustment to fair market value upon death of the owner(s). If the heirs can't figure out how to keep the house via a secured loan and their $650,000 in income tax savings, they probably have much more pressing money problems to deal with I imagine.

pauldenton 3y ago
So what is the Median house value in California? Or San Francisco which this SFChronicle article is from?
- instagib 3y ago
  800k Cali. 1.3M SF.
  - appplication 3y ago
    1.3M would probably be property (including condo etc), not house. Though that is probably what the original asker intended.
davidfischer 3y ago
This isn't as crazy an example as you think. People and companies who bought properties before prop tax increases were capped in 1978 are paying almost nothing in property taxes. I live in California but not in the Bay Area in a house Zillow estimates at $1.2M. I have a neighbor in an admittedly smaller house that Zillow estimates at $740k. In 2022, they paid $482 dollars in property taxes on an assessed value of $34.5k. Whenever they sell, the new owner will pay 20x in taxes. Sites like Zillow show all of this and I can find multiple examples within a couple blocks of my house.

m463 3y ago

do people just put a home in a trust and avoid all this? I remember a friend bought a house, and the deed said <blah-blah> family trust.

deleted 3y ago
[deleted]

blotato 3y ago

...wish I had that problem.