Legal-Ease: An Attorney’s Perspective: Passing Down the Family Home

July 26, 2019 • Columnists, Legal-Ease

Judd Matsunaga, Esq.

I am in the middle of a three-part series on Nursing Home care. In my last article, “Getting Old Is Not for Sissies” (June 28-July 11, 2019), I suggested that families take advantage of the Nursing Home Reform Act (1987) and insist on participating on a personal care plan for their loved one in a nursing home.

I truly appreciate the calls and emails of appreciation and encouragement that I’ve received and plan to follow-up with a 
second article on the illegal use of “psychotropic” drugs in nursing homes, as well as a third article dealing with illegal evictions. 
However, there’s something “timelier” I want to address in this article — how to pass down the family home.

Many Pacific Citizen readers have already sold their homes and moved into retirement homes or moved in with their adult children. Others have properly funded their homes into their revocable living trusts to avoid probate court. Those homes will probably be sold upon the parent’s passing with a step-up in basis and forgiveness of gain.

However, there are quite a few Pacific Citizen readers who plan to pass down the family home to a child or grandchild who plans to continue to reside in the family home. To be sure, the child or grandchild who inherits the family home will want to continue to pay the least amount of property taxes as possible.

Under current law, i.e., Prop 58 (approved in 1986), parents are allowed to give their residential property to their heirs without triggering a tax reassessment. The intent of Prop 58 is to insulate children from absorbing a huge spike in property taxes and help them stay in the family home.

Under Prop 13, an existing homeowner might only be paying $1,500 per year in property taxes. The guy that bought the same house across the street is paying $10,000 per year in property taxes, i.e., assessed at market value. Under Prop 58, the existing Prop 13 property tax is passed down to the child.

California is the only state to offer this tax break. For more than 40 years in California, Proposition 13 has been untouchable, i.e., a “Sacred Cow.” Politicians have feared for their careers if they dared suggest changes to the measure that capped property taxes, took a scythe to government spending and spawned anti-tax initiatives across the country.

But times are changing. Many seniors, who were quite vocal 40 years ago, have either passed away or are not demonstrating or marching any longer. Younger state politicians believe that Prop 13 and Prop 58 robs communities of property taxes that fund vital public services for all residents, including seniors. In other words, these tax breaks may not be available for much longer.

Sen. Jerry Hill (D-San Mateo) introduced a new law that takes aim at Proposition 58.

“We need to close the legal loophole that has allowed some individuals to dodge thousands of dollars in property taxes while reaping rental income from homes they have inherited and do not use as their primary residence,” he told the San Francisco Chronicle in December 2018.

“We’re not touching Prop. 13. We’re touching Prop. 58. The goal is to get people to pay their fair share,” said Hill.

The proposed ballot measure would require people who inherit property in this way to move into the home within a year if they want the property tax break. The change would apply to future heirs, not those who have already inherited homes.

Currently, all real property in California is taxed under the same rules, regardless of how the owner uses it. The only reason for these measures is a desire to increase state revenues. But, changing the law now would be deeply unfair to the younger generation that has been forced to pay the highest Social Security and Medicare taxes in history and are saddled with student debt and stuck with lower-paying jobs than their parents.

“But Judd, what can I do?” If you have a child or grandchild that you want to leave your home to, think about transferring your home and the existing Prop 13 tax rate to your child (or grandchild) now. If you act prior to any new laws, e.g., SCA 3, you will “dodge the thousands of dollars in property taxes” from going up.

But don’t go sign and record a deed gifting your home away. There are legal safeguards that need to be implemented so that you receive a Lifetime Right to Occupy. There are also ways of preserving the “step-up” in basis. It would be highly advisable to consult with an attorney and your CPA before you act.

Judd Matsunaga is the founding attorney of Elder Law Services of California, a law firm that specializes in Medi-Cal Planning, Estate Planning and Probate. He can be contacted at (310) 348-2995 or judd@elderlawcalifornia.com. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or JACL. The information presented does not constitute legal or tax advice and should not be treated as such.

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