tax tips

THE MOST OVERLOOKED TAX LOOPHOLE FOR TRANSFERRING REAL ESTATE AFTER THE DEATH OF AN OWNER

Real estate may be passed to heirs through joint tenancy, probate or trust.  Regardless of the process, there is one important tax exclusion that is frequently overlooked by surviving family members.  It’s a California law called Proposition 58.

What follows is a brief overview of the ways property may be inherited and how heirs can use Proposition 58 to substantially reduce their taxes.

Joint Tenancy

When a person dies owning real estate, a question arises as to how that real estate will be transferred or sold. If the deed to the property says it is in joint tenancy, then an Affidavit Death of Joint Tenant is filed with the County Recorder to complete the transfer and the surviving owner can transfer it.

Probate

If someone dies with property that is just in their name, probate is probably required. The primary reason that probate exists is to transfer assets. To transfer real estate, you need to have the owner sign a deed. When the owner is deceased, probate court is called upon to name a representative to sign deeds and title to other assets. This person is normally called the executor. If a probate is opened, the transfer of the real property is done by the executor signing a deed or by a court order.

If a matter is in probate court, you may be required to obtain the court’s approval for any sale. Any prospective buyer of the real estate may be subject to the court approving the sale only after the court conducts an auction in court so that other prospective buyers have an opportunity to bid a higher price.

Trusts

Many people seek to avoid probate by creating a revocable trust. The name of the revocable trust (also known as a living trust) is put on the deed. If the asset is in the name of the trust, then the trustee of the trust can sign deeds to transfer or sell the property without the necessity of going to probate court. The trust document normally provides that if the initial person who created the trust is unable to sign, then some other person is named as a successor trustee to sign the documents_ Trusts are popular because they avoid the significant cost of probate. Probate fees for attorneys are established based on the gross value of an estate starting at 4% of the first $100,000 with the percentage decreasing thereafter as the size of the estate increases. It is not unusual for a modest probate to cost $12,000-$13,000. It is for this reason many people establish trusts.

Real Property Taxes

One final factor that is often overlooked by families that are inheriting property is the impact of real property taxes. When someone dies, it is considered a transfer of ownership under Prop. 13. A transfer of ownership allows the County Assessor to reassess the property at its then current value for calculating property taxes. This applies whether the real estate is passed through a trust, through probate, by the joint tenancy deed, or even if nothing at all is done. The death of the owner triggers reassessment. This can be a substantial tax increase if an owner has owned the property for decades a property tax many times lower than if it was reappraised at present values.

The law provides relief however, under Proposition 58. If the person is a child of the deceased, or a grandchild (in certain circumstances) that child or grandchild can “inherit” the same property tax bill that was being paid by the deceased.

However, to receive this benefit, you have to take affirmative action by filing a Claim for Exclusion from Reassessment with the Tax Assessor’s office before selling the property or within 3 years of the date of death, whichever comes first.

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About the author…

James Morris/Morris & Associates