Inheriting valuable property in CA - Tax question

Lynne_SJODecember 26, 2008

I have one sibling. We will be inheriting a valuable property (designer home on 1+acres of land) in the SFO Bay Area. Built in 1960, property taxes are extrememly low due to Prop 13. Home was paid off long ago. I have plenty of cash. My sibling does not.

Question: If I buy out my sibling and take full ownership, will this cause the property tax basis to be reset to today's level? (About 1% of the assessed value per month).

Any experienced RE Agents/Mortgage brokers out there know the answer?

Thanks!

Lynne in San Jose

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susana_2006

Lynne:
Good luck. I inherited a Calif. property three years ago. Like in your case, the property taxes were extremely low. One of the first things my probate attorney filed was a form that would allow me to keep the tax rate because I was the daughter of the original owner (he said that only sons & daughters could keep the tax rate when they inherited the property).

I would consult with a California Real Estate Attorney immediately to see if there could be a way for you to retain this valuable tax situation. Good Luck
Susan

    Bookmark   December 26, 2008 at 4:07PM
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terriks

If I buy out my sibling and take full ownership, will this cause the property tax basis to be reset to today's level?

I hope so. The California state budget is in crisis. It seems to me that people who have plenty of cash and can afford to own the property should pay their fair share.

    Bookmark   December 26, 2008 at 4:38PM
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mariend

I agree with Susan, get a good RE attorney or a CPA. Check also on inheritance taxes. If you buy your sibling out, check on those taxes etc. Tax rules have really changes and with the money situation in CA. it only will get worst for awhile.

    Bookmark   December 26, 2008 at 4:38PM
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david_cary

Go Terriks. I suspect that Prop 13 will have to be repealed. It is a shame that such a well intentioned law has ruined the most populous state in the nation.

To OP - you have gotten good advice. No one here can help you with the kind of accuracy you need. I'll assume that you will have to deal with inheritance taxes. Unless you really want to live in that house, you will probably want to sell. But if you have the cash, credit and desire, I would expect that you can find a way to keep the property taxes low. If it were me, I'd plan that those taxes are going to climb and factor that in the equation.

My prediction: CA is going to beg the federal government for money and the smart people are going to say - raise your property taxes. I believe the problem is that repealing prop 13 will probably need a referendum. I am only guessing that the feds can force CA into bankruptcy and then prop 13 can be repealed by a judge. Or the legislators (with a 2/3 majority) will do what the population refuses to do when all the lights get shut off.

    Bookmark   December 27, 2008 at 6:47AM
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Tashina Knight

I'm not a lawyer, but I understand the basics of the propositions and can give you a pretty good guess. You really need to look at Prop 58 rules (not Prop 13) to be sure.

What will happen if you buy her out (let's assume you two were 50/50 owners)IMO is that you will retain the tax break on your 50% and the other 50% will reassess as there is no sibling to sibling tax break.

    Bookmark   December 27, 2008 at 12:13PM
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Lynne_SJO

Thanks to those who attempted to provide meaninginful advice. I was hoping to hear from someone that lives in CA, and may have been through this same issue - but that's OK. Naturally I will be engaging a RE attorney and an estate attorney when needed. I hope that the time is far away, but fear it is drawing closer.

To Terriks & David: Beware. The Green-eyed monster can be an ugly thing - just look in the mirror sometime. If you want assets, you have to work and sacrifice for them. You ought to try it sometime. I threw up all the way through grad school (4.0 in Applied Economics) and have worked non-stop for 50+ years (OMG!). We live under our means - in a modest home in a terrific location; have not taken a vacation since 1981; don't waste $$ on frivolities and pay cash for everything except real estate.

According to the estate attorney we worked with when assisting my parents in setting up their living trust, there will be no inheritance tax consequences due to the structure of the trust; and since the property (and a commercial medical space we own 25% share in) do not exceed the $2M per sibling threshold. You know how it is with appraised versus actual sale value, with the former historically being lower than the latter by a good amount. So, even though we could sell the home and office for more than appraised value - that does not impact inheritance tax basis.

I hated Jarvis/Gann when they implemented Prop 13, but now stand to potentially gain from it - since my sibbling will want the $$ so they may continue to live beyond their means - taking vacations they can't afford and then griping at me bc I drive a nice car.

CA has been ruined by much more than Prop 13. How about Gray Davis, the CARB, Feinstein, Boxer and Pilosi and our current governor for starters? The near junk bond status we have, thanks to them and others of their ilk, means that our state budget deficit will continue to swell and there will be whopping tax increases for those that can afford to remain in the state, as we continue paying for free medical care and housing for the hoards coming over the border to have their children in our hospitals.

Lynne

    Bookmark   December 27, 2008 at 12:51PM
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xamsx

lynne sjo: Thanks to those who attempted to provide meaninginful advice. I was hoping to hear from someone that lives in CA, and may have been through this same issue - but that's OK

Lynne did you miss susana_2006 response? She was in your exact situation three years ago and told you exactly what to do.

    Bookmark   December 27, 2008 at 1:12PM
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dreamgarden

"The Green-eyed monster can be an ugly thing - just look in the mirror sometime. If you want assets, you have to work and sacrifice for them. You ought to try it sometime. I threw up all the way through grad school (4.0 in Applied Economics) and have worked non-stop for 50+ years (OMG!). We live under our means - in a modest home in a terrific location; have not taken a vacation since 1981; don't waste $$ on frivolities and pay cash for everything except real estate."

Lynn, congratulations on applying yourself, working hard and being able to have a nice life. Same thing happened to me. I went without for years and worked hard while others (friends/family) had everything they wanted early on. Now some of them are in financial straits and glowering about my 'luck'. It wasn't luck, it was HARD WORK. You'd think they would be happy for me. ;). I wasn't envious of their good fortune and refuse to apologize for enjoying the fruits of my labor. I hope you enjoy yours as well!

You might want to ask your question on Findlaw.com. Don't use your actual name if you want to remain anonymous. It will show up on google. Good luck.

    Bookmark   December 27, 2008 at 5:19PM
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terriks

I'm not jealous. Why should I be? I just think that you shouldn't be looking for a tax break when others are paying much higher taxes.

    Bookmark   December 27, 2008 at 5:37PM
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terriks

Also, I didn't read any jealousy in David's response. He simply stated the facts as he sees them.
What's wrong with you paying the current tax rate on property that you are inheriting? How did you earn the right to let others pay your share?

    Bookmark   December 27, 2008 at 5:46PM
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david_cary

Lynne - no jealousy here - I hadn't even thought of that. I was just agreeing with Terriks that there is a problem with a taxation system that allows someone with obvious assets to avoid taxes. It is about fairness. I don't see the logic in allowing someone to live in a house worth $5 million (totally a guess) to pay $5,000 a year in taxes. Not when the state that has this law is basically bankrupt and other people are paying their fair share.

The fact that you are asking for advice on how to (legally) avoid paying for your fair share of government in these times means that some people are not going to like it. Taxes are a necessary evil and if there has to be a property tax, then that tax should be based on the property's value today.

I don't voluntarily give extra money to the government and do not really blame you for trying to minimize your taxes. I'd be doing the same thing that you are but I have thought prop 13 was a terrible idea once I was old enough to understand the ramifications. My family is still in CA but I left long ago.

    Bookmark   December 28, 2008 at 6:32AM
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galore2112

I'm paying $5000/year on my modest $200k home. You should be paying $50000/year on your $2M home.

    Bookmark   December 28, 2008 at 8:53AM
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lyfia

First the OP's original post has just a question of if the taxes would be reset. Not specific on how to avoid that. I'd say if this was something I considered doing I would also like to have an idea of the ramifications.

Somebody may have the cash to buy somebody out, but if the monthly costs are going to be huge then it might not be a good idea.

Has nothing to do with avoiding paying their fair share of taxes. Now the 2nd post is another story.

I agree it sounds like Susanna shared her experience and was really close to the OP's situation, but must have been overlooked by OP.

    Bookmark   December 28, 2008 at 11:29AM
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western_pa_luann

The OP saw jealousy where there is none, but overlooked susana_2006 answer.

    Bookmark   December 28, 2008 at 11:53AM
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huskyridor

In my area the property owners taxes lock upon reaching retirement age and the school district taxes are removed from the appraisal list when tallying the total tax due.
I experienced a similar situation with my Grandmothers house. The county overvalued her older home due to square footage based on the sale price per square for homes in her area.
What were once large tracts of farm/ranch land with farm houses out in the country 40 miles from Houston ended up becoming subdivided neighborhoods and what were once nice homes on smaller tracts of land became McMansions after bulldozing the original home.
The property taxes quadrupled after her passing. I was forced to raise the rent so high on a tenant of 10+ years that they bailed.
If we had a break in the taxation we could have kept the place in the family. Unfortunately we couldn't and had to sell. It was heartbreaking.
What we found out was that the county undervalued the land and way overvalued the home.
I'm not calling anyone here right or wrong. But, it would have been unfair to her new neighbors if I'd of kept MeMa's place at her taxes which were locked in in the mid 70's.
Having said that, I can assure you that if I could have got the break I'd of taken full advantage of it regardless of how it affected everyone else. After all it's LAW regardless of how fair/unfair it may be to other property owners.

Good Luck with your situation.

See ya,
Kelly

    Bookmark   December 28, 2008 at 12:12PM
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terriks

Just to clarify, when I said "I hope so", it wasn't out of any feeling of antipathy towards the OP. I just feel that people should be paying taxes on the fair market value of their property. I do understand why prop 13 was passed originally, but I where does it stop? 30 years from now should the OP's heirs still be paying the same low 1970's taxes?

    Bookmark   December 28, 2008 at 4:19PM
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blueheron

I was just wondering if CA still pays the college costs for residents? That seems like a really generous benefit for residents and maybe there's where the state cold cut costs by charging residents at least some amount for their tuition.

Also, I remember some years ago after Prop 13 was passed, an acquaintance whose daughter lived in CA said that the daughter now had to drive the children to school because the school district could not afford school buses. An example of unintended consequences.

    Bookmark   December 28, 2008 at 4:28PM
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annkathryn

California state universities are excellent and California residents are fortunate to have them as an option for their children. That being said, they're not free. The typical cost of attendance (COA) at one of the nine UCs is $25,000/year, and COA at a Cal State University is around $20,000/year (fees + room, board, books and transportation).

The system is under severe financial pressure and CSUs are admitting 10,000 fewer students for Fall 2009 than the previous fall.

The State of California's budget has been decimated by the economic downturn and by the impasse in the legislature. Schools and higher education are bearing part of the burden of this sad state of affairs.

Here is a link that might be useful: Budget cutbacks threaten CSU mission

    Bookmark   December 30, 2008 at 12:17AM
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mary_md7

Well, lynne, congratulations on the 4.0 and throwing up and hard work.

You might want to work on the business about making false assumptions of jealousy. And that immigrant hoard comment was pretty ugly.

    Bookmark   December 30, 2008 at 7:07AM
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dreamgarden

If I buy out my sibling and take full ownership, will this cause the property tax basis to be reset to today's level?

terriks--I hope so. The California state budget is in crisis. It seems to me that people who have plenty of cash and can afford to own the property should pay their fair share.

terriks-I'm not jealous. Why should I be? I just think that you shouldn't be looking for a tax break when others are paying much higher taxes. Also, I didn't read any jealousy in David's response. He simply stated the facts as he sees them.
What's wrong with you paying the current tax rate on property that you are inheriting? How did you earn the right to let others pay your share?

Telling a stranger in a forum that you 'HOPE they have to pay more taxes' is rude. I noticed on your personal page that you have lots of examples of conspicuous consumption.

That house your building, are any of the materials from China? If so, then your supporting slavery for those corporations who ship jobs overseas so THEY can avoid paying taxes. If you didn't have something productive (or helpful) to say, then why did you bother saying anything at all.....

Moral superiority or jealousy?

    Bookmark   December 30, 2008 at 11:16AM
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susana_2006

Lynne:
I'm not sure, but somehow I get the idea that you are gathering information and that inheriting this property is something that is in the future for you.

Anyway, I sure wish that I had gotten some advice ahead of time (when there was still a chance to remedy the problem).
My mother also had a trust and it appeared that everything was in order for an easy transfer of her property.
It was not. My mother had met the flim-flam man (in the guise of a home-improvement consultant). He came to her home and "helped" her to get some necessary repairs & "helped" with financing them. He was also conveniently a notary public, so in her own living room, she signed papers to have property removed from the trust (I'm quite sure that she probably never understood that). Anyway, nobody knew -- until papers were found after her death. From this episode, there was also a bogus lien placed on her property.

Luckily I found a good attorney who was able to restore the property to the trust, untangle some complicated issues, and have the bogus lien holder file a quit claim.

So I would advise everyone to have an attorney review trust & property issues (maybe get a title report to find out about liens). Had I done this in advance of my mother's passing, it would have been quite simple to remedy.
Good luck
Susan

    Bookmark   December 30, 2008 at 5:41PM
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neesie

I'm just curious as to why you threw up all the way through grad school.....did you ever get that checked out?

    Bookmark   December 31, 2008 at 9:32AM
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marge727

I am an estate planning attorney in California and I think you should be talking to a tax attorney or at least a CPA. For one thing, you said something about the 2 million dollar exemption from Federal Estate taxes was per sibling. Maybe I misunderstood but that isn't how it works. I assume you have an A-B trust but you shouldn't be asking anybody but a tax professional because you may have Federal Estate Tax issues and there is only a short time to deal with that without huge penalties. There probably are powers in the trust that would allow you to buy out a sibling during administration.

    Bookmark   December 31, 2008 at 11:17AM
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