I have a house in Palo Alto, California that I bought for less than $30,000 and is now worth about $3 million. There are two things I want to help with:
I am 80 years old and have three children. Will Establishing an LLC or Revocable Living Trust Help? I still want to retain the power to do as I wish with the property in case of need. He has a mortgage of $400,000, and currently has a tenant with a one-year lease. Thank you for helping me do what I need, as the deadline for transferring deed to relatives is in December if I want to maintain the original tax base.
Preparing in Palo Alto
‘The Big Move’ is a Businesshala column looking at the ins and outs of real estate, from navigating a new home search to applying for a mortgage.
Do you have questions about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passi at [email protected]
It is never too late or too early to strategize the best way to leave a huge legacy for your loved ones. And your dilemma, in particular, clearly illustrates the challenges that many longtime homeowners face when it comes to leaving their homes to their heirs.
You have benefited from long-standing tax regimes that have made it possible to build a home as expensive as yours in an expensive coastal real estate market. And it seems clear from your letter that your children will not be able to bear the property tax that comes with such property if they buy it themselves today.
Before I begin answering your questions, I want to commend you for taking a clear view of what your children will do with your home when you leave. Too often parents assume that their children or grandchildren would like to inherit to live in that family home. The reality is, especially if your children are older, they are likely to have their own house and there is no need to take another one as an investment property as well. If the last two, pandemic-ridden years have taught us anything, being a landlord isn’t always easy.
So I’m glad you’re considering all the possibilities — what the property-tax picture would be if your kids owned your home for a long time, and what in the case of capital gains taxes if they sold it after you had it. Huh.
Property Taxes Just Got More Complicated in California
Now, let’s address your first question. For those living outside of California, a quick primer: Proposition 13 is a constitutional amendment to California that limited increases in the property tax on homes throughout the state. Specifically, a property can only be revalued for tax purposes when there has been a change in ownership, when new construction has been completed or there has been a decline in market value.
But last year, another amendment approved by California voters, Proposition 19, changed key components of taxation policy. While it allowed old or disabled homeowners or those displaced by natural disasters to transfer their existing tax assessment value to a new home, even if it is more expensive, it did allow transfer of these tax benefits among family members. capacity is limited. Notably, in the past, a child could inherit the home as well as the taxable value of his parents, but now it is not so straightforward.
The good news is that converting your home into a rental property will not require a home revaluation for property tax purposes. However, it can make a difference in whether and when your children inherit the home.
“The Proposition 19 rules say you can give your children a principal residence, as long as it was the parent’s primary residence first, and then it is the child’s primary residence,” said Yin Ho, a California-based Senior associate in the real estate team of international law firm Withers. Because the house is now a rental home, if you now pass away, your children will not be entitled to this benefit.
Ho notes that if you change your mind in the future and start living in the home yourself, you can preserve that benefit. However, your children will need to plan to stay in the home after your death—if they don’t, they won’t be eligible again.
The deadline for transferring property to one’s children to retain the property-tax assessed value was back in February, so you’ve missed a window of opportunity. But such transfer is not beneficial from the capital gains tax perspective, as it would take away your children’s ability to receive step-up on Aadhaar.
Similarly, if the property was owned by an LLC, it might continue to qualify for this tax break, but because it wasn’t the strategy won’t help you here.
Rental Homes Can Still Get a Step-Up on an Inherited Basis
When it comes to the base of the step-up, you are right there. Ho said rental homes are just as eligible for this as primary residences. As long as your children are able to sell the home quickly after they die, they should face little in the way of capital gains taxes. At one point some Democratic lawmakers were considering reducing or eliminating this tax benefit as part of the Build Back Better social-spending package, but those proposals went nowhere.
Still, there are several reasons why you might consider forming an LLC or trust to own a home. The LLC can offer legal and financial protection should any problems arise with one of your tenants in the future. And a well-designed trust can keep assets out of the probate process, allowing it to pass more quickly to your children after you die. This can help them sell the home more quickly and avoid a bigger tax bill.
As I suggest to several readers who write in The Big Move, find an accountant or attorney who is well-versed in estates and property ownership to ensure your children get the most out of your home. Will prove to be extremely important in helping you determine the best path. Hopefully this information will be a useful starting point for you as you explore what options are still at your disposal. Best wishes.
By emailing your questions, you agree to publish them anonymously on Businesshala. By submitting your story to Dow Jones & Company, the publisher of Businesshala, you understand and agree that we may use your story, or versions thereof, across all media and platforms, including through third parties.,