Here in California, real estate is often the single most valuable asset detailed in individual estate plans. Whether you have one residence or perhaps a vacation home as well, it’s important to determine what you want to happen to your property after you’re gone.
If you’re leaving a home to an individual, like one of your adult children, first, be sure that they want it (either to immediately sell, rent out or live in). Another option is to direct that it be sold and the proceeds returned to the estate for division among your beneficiaries.
It’s also important to consider the tax implications of an inherited home in California since property taxes can be extremely high in some areas. Since these taxes depend in part on the home’s value, how your home will be valued after you’re gone is important to understand. State law around this has changed in recent years.
How has the law changed?
Until a few years ago, anyone who inherited a California home paid the same property taxes assessed to the deceased owner based on the home’s value when that owner bought it. For old properties that were worth far more in the current market, that could mean a very low tax rate on a very expensive property.
Not surprisingly, many people took advantage of this low rate (which could increase by no more than 2% annually) to rent out inherited property in order to take advantage of a nice income. That came to be known as the “Lebowski loophole” because the children of actor Lloyd Bridges and his wife (including The Big Lebowski star Jeff Bridges) did this – legally – with their late parents’ decades-old Malibu home.
That loophole was closed in 2020 when voters approved a proposition that requires a property value reassessment whenever a home is sold or inherited. If the beneficiary makes it their primary residence within a year of inheriting, they get a $1 million off the new assessed value for tax purposes. The goal was to get more properties on the market and out of the hands of people keeping them as rental properties for a tax advantage.
It’s a lot to think about. However, it’s always crucial to consider the impact of any large inheritance on the person to whom it’s left. That’s just one reason it’s smart to have sound legal and other professional guidance during estate planning.
