Proposition 19 and California home inheritance

If you’re preparing to put your estate plan in place, you’ve likely realized that your home is one of the most valuable assets you have. If you’ve owned the house for decades, it’s likely worth considerably more than you paid for it.

If you’re considering leaving your home to a loved one, like an adult child, it’s important to make sure that they want it. Inheriting a home comes with a lot of responsibilities. It can also create an unwanted tax burden.

What was behind Prop. 19?

Four years ago, California voters approved a measure called Proposition 19 that was intended to ensure that people who inherit a home pay a fair property tax on it. It was also intended to open up more housing since it would no longer be as profitable for people to hold on to inherited property and rent it out.

Prior to the change in the law, those who inherited a home could continue to pay property taxes based on the home’s original value. (That value could increase for tax purposes no more than 2% per year thanks to another law, Prop. 13, passed in the 1970s.)

Not surprisingly, families in areas like San Francisco and Los Angeles could make more in a month by renting out an inherited property than they had to pay annually in property taxes. This was widely known as the “Lebowski loophole.” That’s because it was discovered that actor Jeff Bridges and his siblings did that with a beach house in Malibu their parents had purchased back in the 1950s. Of course, they were just one among many families that benefited from Prop. 13.

What did Prop. 19 change?

Now, a property’s value is reassessed whenever ownership changes. That means the new property tax reflects what it’s worth when it’s inherited. However, if the beneficiary makes the inherited property their primary residence within a year, they can get a $1 million exclusion from the tax reassessment. Note that if it’s a multi-unit property (like a duplex), only the unit occupied by the beneficiary qualifies for the exclusion.

It’s always crucial to communicate with heirs and other beneficiaries before leaving them an asset they may not want or one that could end up having negative financial ramifications for them. It also helps to have sound estate planning as well as financial and tax guidance to help your loved ones get the most value from your estate.