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Prop. 19 dramatically changed the math of inheriting your parents\u2019 home.<\/p>\n
Yalonda M. James\/S.F. Chronicle<\/p>\n
There\u2019s no shortage of data points to describe how difficult it can be to buy a home in California, particularly in the state\u2019s costly urban metropolises. Home prices<\/a> remain far higher than the rest of the country; it can take decades to save for a down payment; the rise in mortgage rates<\/a> in past years has locked even more buyers out, while it also locks in many owners<\/a> to their current home\u00a0\u2014 making a tight market even more so.\u00a0<\/p>\n When my grandparents moved to California from Taiwan in the early \u201990s, they bought a home in the East Bay for just over $320,000. That home is now worth more than five times that amount, and it\u2019s become my home\u00a0\u2014 my husband and I are gradually renovating and planning for the long haul; one day we will inherit it. We feel incredibly fortunate, as it\u2019s unlikely we would be able to afford such a home on our own.<\/p>\n Yet amid all the challenges to homeownership, here\u2019s another: the math on inheriting a home is changing, with many people in similar situations to mine finding the benefits of keeping an inherited property not as great as they once were.<\/p>\n Article continues below this ad<\/p>\n This is especially true in California, where a law that went into effect in 2021 has dramatically changed the inheritance math, with one estate attorney calling it the \u201cworst thing to happen in inheritance law in California in decades.\u201d<\/p>\n So in California and the Bay Area, what options do you have if you inherit a home, or are planning to pass property on to your children? What factors should you consider before deciding to live in the home, rent it out or sell it?<\/p>\n San Francisco Chronicle Logo<\/p>\n Make us a Preferred Source to get more of our news when you search.<\/p>\n <\/p>\n Add Preferred Source<\/p>\n <\/a><\/p>\n The positives of inheriting a home\u00a0\u2014 and keeping it<\/p>\n If your parents left you their home, it can seem like a jackpot in the expensive Bay Area. Keeping a family home can also be very meaningful, especially after the difficulty of losing a parent.<\/p>\n Article continues below this ad<\/p>\n \u201cThere\u2019s a lot of sentimental value in inheriting a home,\u201d said San Francisco estate planning and probate attorney Elizabeth Button. \u201c \u2018We grew up here, we don\u2019t want to get rid of it.\u2019 It would be like saying goodbye to a family member all over again.\u201d<\/p>\n Emotional attachment is a major driver for some of Button\u2019s clients, some of whom have even taken second jobs to afford the costs of keeping the family home, she said.<\/p>\n For those who choose to sell, the inherited property comes with a built-in capital-gains-tax perk, experts said.<\/p>\n \u201cIf you are planning to sell the property, there should be minimal (capital gains) taxes since the value of the home gets \u2018stepped up\u2019 or moved up to the fair market value at the time of death, freeing the inheritor from capital gains taxes in most cases,\u201d said Ariana Alisjahbana, lead adviser with North Berkeley Wealth Management.<\/p>\n The challenges<\/p>\n But if there\u2019s still a mortgage on the property, or major renovations or repairs are needed, that can be a big financial burden for inheritors. In the Bay Area, \u201ca lot of people are house rich and cash poor,\u201d Button said, which means they don\u2019t have a lot of extra money to put into upkeep or new loan payments.<\/p>\n Article continues below this ad<\/p>\n In addition, the family home often is left to multiple siblings equally, which can lead to disagreements about what to do with the property.\u00a0<\/p>\n \u201cIf three siblings inherit a $1.5 million house from their parents, and only one of them wants to keep it, she will have to buy out the other siblings\u2019 share for $1 million, which reflects the high cost of housing in the Bay Area,\u201d Alisjahbana said. \u201cIt\u2019s often not possible to buy out the siblings\u2019 shares, so in this situation it\u2019s common to sell the house.\u201d<\/p>\n Another reason to sell can be that the inheritors have already made a life in another city or state, and don\u2019t plan to relocate.<\/p>\n \u201cRenting the home out is an option, but not everyone is interested in becoming a landlord and managing a rental property,\u201d Alisjahbana said.<\/p>\n In order to transfer or inherit a property after a loved one dies, you usually have to go to probate court<\/a>. It\u2019s a lengthy and costly process and cases can take anywhere from nine to 18 months.\u00a0<\/p>\n Article continues below this ad<\/p>\n For those passing down property to their children, legal experts recommend meeting with an estate planning lawyer and setting up a living trust. This can help your children bypass probate court, or at least shorten the probate process.<\/p>\n How California\u2019s Prop 19 changed the math<\/p>\n But a living trust does not address the complexities that have arisen with California\u2019s Proposition 19, which went into effect in 2021<\/a> and curtailed the tax benefits on property transfers between parents and children.<\/p>\n Prop 19 is the latest in a series of propositions over the past four decades that have shaped and then reshaped how Californians pay property taxes.<\/p>\n The 1978 ballot measure Proposition 13 capped property tax increases at 1% of the full cash value of the property as assessed in 1975, and which thereafter would be reassessed only when purchased or during a change in ownership. Annual increases are limited to 2%. Proposition 58, which went into effect in 1986, allowed a parent to transfer a home to a child without the property\u2019s value being reassessed. These two amendments resulted in a generous tax break for those inheriting property from their parents.\u00a0<\/p>\n Article continues below this ad<\/p>\n That\u2019s especially true because of the steep appreciation in home values over the past generation in California and the Bay Area. Just in the past 25 years of data available on real estate listings site Zillow, the value of a typical home in the San Francisco metro area has increased from about $284,000 to $1.1 million, or nearly four times. Zillow\u2019s estimates for typical home value are based not only on the prices of recently sold homes, but also on the estimated value of all homes within a selected area based on the selling price trends of similar homes in the area.<\/p>\n Alexandra Ayoub, an Oakland estate planning attorney, said Prop 19 is \u201can attempt to rectify some of the fallout from Prop. 13\u201d and to \u201cregain some of that lost tax revenue.\u201d<\/p>\n Under Prop 19, the parents\u2019 tax basis does not pass to the child. However, if the home was the primary residence of the parent before they passed away, and the child makes it their permanent family home within one year after the property transfer, they can apply to have up to $1 million of the value excluded from reassessment. Even with this exclusion, heirs are likely to see a substantial increase in annual property taxes, amounting to thousands or even tens of thousands of dollars, Button said.<\/p>\n For those who would use the home as a second residence, they would have to pay property taxes based on the assessed fair market value, thus would see an even steeper increase in taxes.<\/p>\n \u201cThe intention was to shift the tax burden from certain homeowners and increase the burden on owners of inherited properties,\u201d Ayoub said.<\/p>\n \u201cI think that Prop 19 has really thrown a wrench into how families might plan to pass along their homes, or perhaps more so, how siblings might agree to share in the family home as an asset,\u201d Ayoub said. \u201cThe high cost of entry into the real estate market in the Bay Area has put a ton more pressure on this issue.\u201d\u00a0<\/p>\n Though California doesn\u2019t have an inheritance tax, Button said Prop 19 has basically created one. She says Prop 19 has made it very difficult for many people to keep inherited homes because they cannot afford the additional property taxes\u00a0\u2014 and she expects this issue to become only more widespread going forward.\u00a0<\/p>\n \u201cMost heirs are not equipped to take on a tax bill that could potentially jump from $800 to $20,000 on the death of a parent,\u201d she said. \u201cIt will force a lot of families out of California where, before, they would have had the chance to stay.\u201d<\/p>\n You\u2019ve inherited a home. Now what?<\/p>\n You could find yourself in many different scenarios if you inherit your parents\u2019 home. If you have siblings, Alisjahbana said, it can be \u201can emotional and delicate time to make big decisions.\u201d<\/p>\n \u201cTake time to make sure you are on the same page about the next chapter of the home you\u2019re inheriting,\u201d she said.<\/p>\n If you decide to sell, Alisjahbana suggests doing so as soon as you can.<\/p>\n \u201cFrom a capital gains standpoint, you get a \u2018step up\u2019 on the basis of the property to the fair market value at the time of death, which means most people don\u2019t need to worry about capital gains taxes when selling an inherited home,\u201d she said.<\/p>\n If you decide to rent it out, Alisjahbana said to become familiar with local landlord and tenant rules.<\/p>\n \u201cEvaluate the property\u2019s costs \u2026 and weigh them against possible rental income,\u201d she said. \u201cDon\u2019t forget to include the cost of your own time to manage the property or the cost of a property manager.\u201d<\/p>\n Additionally, Button suggests talking to a CPA to help you \u201ccrunch the numbers\u201d and sort out the tax implications.\u00a0<\/p>\n And keep in mind, this is not a one-size-fits-all process.<\/p>\n \u201cEach family\u2019s decision will depend on (many) factors that will go beyond the dollars and cents of taxes,\u201d Ayoub said. \u201cHomes and homeownership is important to many, and often these decisions involve making hard choices. There is no cookie cutter answer here. Also, the laws change all the time. Prop 19 might not be here for long\u00a0\u2014 who knows?\u201d\u00a0<\/p>\n This is an updated version of a story originally published in 2023. Since its first publication, it has become one of the Chronicle\u2019s most popular articles of all time and we have received many reader questions on Prop 19\u2019s impact. <\/p>\n We have answered some of those questions in this Q&A.<\/a><\/p>\n