Being a California inheritor of a family home can be a monetary chance and a tax difficulty. In general, the IRS provides the step-up in tax basis for inherited property; however, California’s Proposition 19 might cause a reassessment of property tax liability even if capital gains taxes are low.
With knowledge of how these rules all work together, heirs can help ensure that their inheritance is maintained and they do not find themselves in a situation where there are unexpected expenses. Hire professionals who can help you with Los Angeles tax relief.
Read and comprehend the concept of Step-Up in Basis and Proposition 19
Typically, the IRS values inherited property at its “fair market value” at the time of the previous owner’s death. This is referred to as increasing basis. For instance, if a parent bought a home for $250,000 and when he or she died, it was worth $1 million, then the basis of the heir would be $1 million unless there are any applicable exceptions.
The potential taxable gain would be the difference between the $1.05 million sale price and the original gift value, which is about $50,000, assuming the heir later sells the structure for the $1.05 million. The gain might have been much greater without the step-up.
California Proposition 19 is about property taxes. Exclusion from reassessment is available for transfers between family members in a transfer of a family home. In general, the child must make it their primary residence, and the transfer must meet value, filing, and other requirements. Find a professional group (like the best tax settlement company) that can help you.
The difference is important because one can inherit a home with a low federal tax basis and still be paying a high California property tax.
You, your family, and your choices: Your Action Guide to Protect Your Inheritance
- Get a Date of Death Appraisal
Have a professional appraisal determine the home’s fair market value at the time of the owner’s death. Keep the report and supporting documents. This valuation can be used to set up the inherited tax basis and to determine capital gains upon sale.
- Review Trust and Estate documents
Talk with an estate planning attorney about the type of ownership, transfer provisions, and how this may impact eligibility for Proposition 19 relief. Ownership is not enough to exclude from reassessment.
- Meet Proposition 19 Requirements
In general, the heirs are required to occupy the inherited property within one year of the transfer and must claim the homeowner’s exemption within the relevant time frame. There is a value cap for the exclusion, and the processing time of the application is important. Notify the county assessor as soon as possible to verify requirements. Choose a professional (like an EDD audit lawyer) when you are facing serious tax trouble.
- Take into account the Section 121 Home-Sale Exclusion.
The Internal Revenue Code Section 121 allows eligible taxpayers to exclude up to $250,000 (or $500,000 for married taxpayers filing jointly) of qualifying home-sale gain. Normally, for a 5-year period before the date of sale, the ownership and use requirements must be met for a period of 2 years. Special rules may apply to inherited property situations, so check before using this exclusion.
Tips for Avoiding Expensive Tax Errors
- Maintain documentation of any renovations, improvements, or selling costs that may impact AB.
- Know how to differentiate between calculations of property tax reassessment and capital gains tax.
- Ensure that if siblings inherit a home, they understand who owns the property, who will live in it, how they will finance it, etc.
- Before renting, transferring, or selling the property, check out possible tax implications.
- When trusts and/or multiple heirs exist, contact a tax professional and estate planning attorney.
Care must be taken to coordinate federal income tax rules with state property tax requirements in the case of inherited California real estate. With a timely appraisal and a well-documented estate transfer, and by moving to have the estate reviewed under Proposition 19 in a timely manner, heirs can avoid needless expenses. Whether selling or living in the property, it is important to understand both systems beforehand to ensure that the value of your inheritance is not lost.
