Will I have to sell inherited property to pay property taxes | California Proposition 19

Dear Len & Rosie,

My parents have multiple properties that I’m supposed to inherit after they pass. I’ve read that because of the passage of Proposition 19, the property tax bills on each of their properties will skyrocket. I may have to sell properties to come up with the money to pay property tax. Is there any way to avoid this?

Sarah

Dear Sarah,

Proposition 19 limits the parent-to-child transfer reassessment exclusion to just your parents’ residence, and only if you establish your own residence there within one year of its transfer to you. Also, if the market value of your parent’s home is greater than $1,000,000 above the property’s “base value” (that’s the assessed value reported on your parents’ property tax bill) then the amount in excess that will be added to your new assessed value.

For you, the most important date of the new year may be February 15, 2021. Your parents can still transfer property to you under the old Prop 58 rules, as long as the deeds are recorded on or before that date. If your parents own income property whose income they don’t really need, they can give it to you now, saving you thousands of dollars a year in property tax for the rest of your life.

There is a downside. Basis follows Gift. The cost basis of your parents properties (that is, the amount they’ll get tax free if they sell them) be stepped up when they die if they give these properties to you now. You’ll have their old cost basis, and thus more capital gains tax to pay if and when you ever sell these properties.

There’s a way to avoid that too. Your parents can create an irrevocable trust specifically designed to accomplish the following: First, your parents will retain no beneficial interest in the trust. Instead you will be the beneficiary. That means funding the trust, on or before February 15, 2021, will qualify the transfer under the Prop 58 parent-to-child transfer reassessment exclusion.

Second, if the trust includes a provision allowing your parents to change the trust beneficiary to someone other than you, but not themselves, then the trust properties will receive a step-up in cost basis upon your parents’ deaths under Internal Revenue Code section 2036(a)(2). This will give you the best of both worlds - avoiding reassessment while giving you a higher cost basis upon your parents’ deaths.

Don’t forget the February 15, 2021 deadline. To be safe, you’ll want everything to be complete, including the recording of the deeds, by that date.

Len & Rosie

Tax Consequences for "gifting" money

Dear Len & Rosie,

My sister is renovating some space in her house so that our elderly father can live with her. We siblings want to give her money to help pay the cost of these renovations. How do we do this so that she does not have to pay income tax?  Would these funds, maybe $65,000 altogether, be considered a gift to her?

Sandy

Dear Sandy,

It’s refreshing to read about family members cooperating and helping one another in such a manner. We usually learn of arrangements such as yours only after problems occur.

Your situation is fairly straightforward. Your sister will not have to pay income tax on the money gifted to her from you and your other siblings. Gifts are received, not earned, so gifts are not subject to income tax, except for tax-deferred assets, such as a United States Savings Bond, and in that case the tax isn’t due until the Savings Bond is cashed in.

You may give your sister as much money as you wish and she won’t have to pay any income tax. However, if you give her more than $15,000 during any one year, you will have to file a gift tax return, IRS Form 709, with the income tax return you’ll have to file by next April 15th. The amount you give her above $15,000 is subject to federal gift tax. You won’t have to pay any gift tax now, but the amount of the gift in excess of $15,000 will reduce the amount of your assets that avoid the Federal Estate Tax (the death tax) when you die. However, in 2019, up to $11,400,000 will pass free of the estate tax on your death, well, you should have those problems.

There are even ways of getting around this. You may gift your sister $15,000. So may your spouse if you are married. Each of your other siblings and their spouses may gift up to $15,000 to your sister without causing any tax liability or the need to file a gift tax return. It should be easy to break the gifts apart into small enough pieces to avoid any gift tax issues.

Just make sure that you do not wind up in a situation that may break your family apart. It is clear to us that your purpose in giving your sister this money is to keep your father out of an impersonal care facility. It’s important for you to understand that your sister has a limit as to what help she can provide her father, even if she doesn’t acknowledge this now. What will you do if she reaches her limit and your father has to be transferred to a nursing home? Will you be angry that your sister has a new addition that you paid for? Will you demand your money back? It’s best to resolve these potential problems now before they become problems.

Len & Rosie