Navigating Property Inheritance Laws in California: What You Need to Know About Inheriting Multi-Family and Commercial Properties

Inheriting property can be both a blessing and a challenge. Understanding the state's property inheritance laws is crucial for those inheriting multi-family and commercial properties in California. Recent changes, particularly with the implementation of Proposition 19, have significantly impacted how property taxes are assessed for inherited real estate. Here’s what you need to know to navigate this complex landscape.

Key Changes Under Proposition 19

Effective February 16, 2021, Proposition 19 brought substantial changes to California's property tax rules regarding inherited properties:

1. Primary Residence Benefits: If you inherit a primary residence, you can transfer the property tax assessment without a reassessment, provided you use the home as your primary residence. However, the home’s market value cannot exceed $1 million above the assessed value.

2. Impact on Multi-Family and Commercial Properties: Unfortunately, the benefits of Proposition 19 do not extend to multi-family or commercial properties. Upon transfer, these types of properties will be reassessed at their current market value, potentially resulting in a significant increase in property taxes. This reassessment can impact your overall financial planning and the property’s profitability.

3. Grandparent-Grandchild Exemption: A provision that allows property transfers between grandparents and grandchildren to avoid reassessment. However, this only applies under specific conditions and primarily focuses on primary residences.

The Step-Up in Basis

One important concept to understand when inheriting property is the step-up in basis. When a person inherits property, the tax basis of that property is typically adjusted to its fair market value at the time of the decedent’s death. This means:

• If you inherit an appreciated property, your tax basis will be reset to its current market value rather than the original purchase price.

• For example, if a family member purchased a multi-family property for $300,000 worth $1,000,000 at their passing, your tax basis becomes $1,000,000. If you decide to sell the property later, you would only pay capital gains tax on the difference between the sale price and the stepped-up basis rather than the original purchase price.

This can result in substantial tax savings, as it minimizes the capital gains tax liability you would face when selling the property.

Understanding the Probate Process

While Proposition 19 changes how property taxes are assessed, it’s important to remember that the probate process may still apply. If the inherited property is part of a will, it may need to go through probate court unless held in a living trust. This process can be time-consuming and may incur additional costs, so planning is crucial.

Estate Planning and Trusts

Utilizing living trusts can be a smart strategy for those looking to avoid the complexities of probate and reassessment. A properly funded and maintained trust can help ensure a smooth transition of multi-family or commercial properties to heirs, preserving the property's value and minimizing tax implications. It’s advisable to consult with an estate planning attorney to ensure your estate plan aligns with current laws and best practices.

Tax Considerations

Although California does not have a state estate tax, federal estate tax laws may still apply depending on the estate's value. Heirs should be aware of these potential tax obligations when inheriting significant properties. Consulting with a tax professional can provide clarity on your specific situation.

Conclusion

Inheriting multi-family and commercial properties in California has unique challenges, especially in light of recent legal changes. Understanding Proposition 19, the step-up in basis, the probate process, and the importance of effective estate planning is essential for navigating this journey successfully.

If you’re facing the inheritance of property and need guidance on property appraisal or real estate brokerage services, we’re here to help. Our team specializes in navigating the complexities of real estate transactions in California, ensuring you make informed decisions every step of the way.