Category: Estate Planning
The price of real property in California is very high compared to the rest of the United States.
But how much more expensive is it?
Recent data shows that California homes often cost twice as much as similar homes in other states. A bottom tier home in California can cost 33 percent more than a mid tier home elsewhere.
For many families, their home is their most valuable asset.
When clients visit an estate planning attorney, they often focus on one goal. They want their home to pass to their children smoothly and without issues.
Most beneficiaries would gladly inherit California real estate. However, property taxes can create a serious problem.
Unless an exclusion applies, the county will reassess the property after the owner’s death. This reassessment can increase property taxes dramatically.
In some cases, beneficiaries must sell the home because they cannot afford the new tax bill.
To understand this issue, we must first look at how property taxes work in California.
Property taxes are based on the purchase price of the home. A simple rule is to multiply the purchase price by about 1 percent. Local taxes often add another 0.25 percent.
Counties can increase the assessed value each year. However, the increase cannot exceed 2 percent annually.
A transfer of real estate usually triggers reassessment. This includes transfers after death.
Reassessment can create a major financial burden for heirs.
Consider a common example.
Parents bought a home in San Diego in the 1970s for 15000 dollars. Their property taxes remain very low due to annual limits.
By 2025, their yearly taxes may be around 360 dollars.
Now assume the home is worth 1000000 dollars when they pass away. If no exclusion applies, the county reassesses the property.
The new property taxes may rise to about 10000 dollars per year.
Prop 13 and Prop 19
California law provides certain reassessment exclusions.
Before 2021, Proposition 13 allowed broad transfers between parents and children. Many properties avoided reassessment, even if they were not primary residences.
That changed with Proposition 19.
Under current law
Parents cannot transfer non primary residences without reassessment.
Children must move into the inherited primary residence to qualify for exclusion.
The home must become the child’s principal residence.
These rules create challenges for families with multiple properties.
Using an LLC to Reduce Reassessment Risk
Some families explore advanced planning strategies. One option involves holding property through a limited liability company.
California applies different reassessment rules to legal entities.
If an LLC purchases property, reassessment may not occur later. This depends on ownership changes over time.
The key rule is simple. No person can gain more than 50 percent control of the LLC.
If ownership remains below that threshold, reassessment may not trigger.
This rule comes from the case Ocean Avenue LLC v. County of Los Angeles.
This strategy can work well for families with multiple children. Each child can receive a partial interest in the LLC.
However, timing is critical. The LLC must purchase the property from the start. Transferring property into an LLC later may trigger reassessment.
Final Thoughts
Property tax reassessment can create serious problems for families in California.
Without proper planning, heirs may face large tax increases. In some cases, they may need to sell the property.
Careful estate planning can help avoid these outcomes.
If you own real estate in California, it is important to plan early.