Recently we have been encountering a number of adult children who are are having difficulty administering their parents’ estates after they pass away.
One problem area has been with property tax reassessments. While a property tax reassessment can be avoided when a child inherits a parent’s’ home under California law, this parent-child exemption is not automatic!
Instead, a Claim for Property Tax Reassessment Exclusion must be prepared by the adult child and submitted to the county tax assessor’s office of the county where the property is located within three years of their parents’ death. This claim must be filed regardless of whether the property is to be held in a continuing trust or received outright.
Filing this important document along with properly prepared transfer deeds and a preliminary change of ownership report (PCOR), will preserve the parent-child exclusion and ultimately prevent a property tax reassessment. Be careful though, any minor mistake (even one missed dotted “i” or crossed “t”) will cause these forms to be rejected. More importantly, failure to file a Claim for Property Tax Reassessment Exclusion can put your parent-child exemption is in danger of being waived leading the property to be reassessed at a much higher tax rate. For some properties this could be extremely costly and involve thousands of dollars in new taxes.
This leads to the second important step that needs be taken in regard to a parent’s home following their death. Whether you wish to live in your parents’ home or intend to sell it, the names on the vesting deeds (what we call commonly refer to as “title”) need to be updated to reflect the legal transfer. Sometimes this is easy, such as when there is only one surviving child as a beneficiary or the parents gifted the home to a single person. However, transferring title can get more complicated when multiple children, beneficiaries, or continuing trusts are involved.
Lastly, make sure you have your the home appraised soon after their passing. This will help you minimize capital gains taxes by calculating a timely and accurate stepped up basis.
Basis is a value that the government uses to measure how much an asset has appreciated over time. Think of it as an asset’s purchase price. Think of it as the purchase price. The profit margin, or the difference between the sale price and the purchase price is called a capital gain. A capital gains tax is then an income tax on the earnings from the sale of an appreciated asset such as a home. In other words it’s a tax on profit. Both the state of California and the federal governments have such a tax (just at different rates).
Generally speaking the lower the basis, usually the higher the profit margin upon sale and thus the higher capital gains tax ramifications. However, one way to minimize this capital gains tax liability is to reduce the profit margin by a stepped up basis. Now you can’t go back in time and change the original purchase price, but the tax laws do allow for an adjustment if an asset such as a home is transferred upon death as opposed to transferred in life. A transfer of an asset in life has a “carry-over basis” such that the purchase price follows with the asset to the new owner. A transfer at death, however, allows for a “step up in basis” such that the basis value increases from the original purchase price to the fair market value at the time of the owner’s death.
That is why you need to get your parent’s home appraised when they die – to best preserve this important step up in basis. That way, even if you choose not to sell your parents home right away, you will have an accurate record to offset capital gains taxes in the future. You could do the appraisal much later (and some have no choice because they did not know to do is sooner), then it is more difficult, less accurate, and more expensive.
To sum it all up, when inheriting your parents’ home an adult child must do these three things first: (1) file for a property tax reassessment exclusion; (2) properly record new deeds to update title, and (30 get a timely appraisal. If you know someone whose parent recently passed away, kindly share this information with them. Do not assume they know or have been told. If the types of conversations we are having are any indicator, many are unaware or misinformed.
