By Gina Gaudio-Grace, Platinum Trust Group
In November 2020, California voters passed Proposition 19, a state constitutional amendment, with 51.1% of voters approving it. The new law comes into effect on February 16, 2021. This means that you have a short period of time to act under the current law.
The way we were: how it works today
To understand the impact Proposition 19 will have on apartment owners, it is helpful to recognize that it modifies Proposition 13 (originally adopted in 1978). Under Proposition 13, parents are allowed to transfer: (i) their primary residence, and (ii) up to $ 1 million in assessed value from other properties, to their children without triggering a reassessment for the purposes of property tax. This means that children can keep their parents’ low property assessment following the transfer of a primary residence or the first million dollars of assessed value (which is usually significantly less than fair market value) of investment property.
These same rules also apply if a grandparent is transferred to a grandchild, provided that the parents of the grandchild are deceased. Under Proposition 13, people over the age of 55 and severely disabled people can sell a primary residence and buy property of equal or lesser value and receive the same low property tax assessment they initially had in the city. property sold, provided however that the new property is in the same county as the original property.
What has changed with Proposition 19?
Proposition 19 changed these rules in several ways. First, the exemption from reassessment up to $ 1,000,000 of the assessed value of property other than a principal residence transferred from a parent to a child or from a grandparent to a child. -child will disappear completely. Second, although parents can still transfer their primary residence to their children, their children alone receive the lowest assessed value if they use the property as their primary residence. In addition, if the fair market value of the property at the time of transfer exceeds the assessed value of the parent company by more than $ 1 million, the property will be partially revalued. In other words, the adoption of Proposition 19 is a huge increase in the property tax imposed on our descendants.
So, according to Proposition 19, if a parent chooses to transfer their primary residence to their children during the parent’s lifetime, the children only benefit from lower property taxes if they move into the house with their parents! This may not be practical, feasible, or desirable for many adult children who have families of their own to think about, or who have jobs in other areas far from their parents or even other states.
Warning: watch out for your capital gains taxes
Some attorneys are advising their clients to rush into transfers of primary residences and up to $ 1 million in assessed value of other real estate before the current Proposition 13 law is completely gone on February 15, 2021. Although this solution preserves the lower property tax rate for the child to receive the property, this could create another problem for the child. If a parent transfers property to a child at the time of the parent’s death (whether through a will or trust), the child automatically receives a base increase. But if the parent makes an “inter vivos gift” to the child during the parent’s lifetime, the child will receive the real estate on the parent’s original basis.
This means that when the child decides to sell the property, the child will be liable for capital gains tax on the amount of the sale minus the parent’s original basis. This could cost the child hundreds of thousands to millions of dollars in additional capital gains taxes. So, it might not be a good idea for parents and grandparents to rush into a property transfer before the February 15, 2021 deadline without seriously considering the ramifications of the transfer.
Here is a solution
So how can apartment owners transfer their assets to their heirs without triggering a revaluation and without making their heirs liable for a mountain of capital gains taxes? The solution is to use a highly specialized type of non-grantor trust that is not self-settling and designates the current owner as the beneficiary (or one of the many beneficiaries). With this type of specialized trust, the trust is able to derive income from passive activities: the trust owns a rental property generates rent and rental income that is earned when the apartment building, single-family residence or commercial property) and, in accordance with Section 643 (b) of the Internal Revenue Code, defers income tax in perpetuity – as long as the income is added to the trust corpus (meaning it does not ‘is not distributed to beneficiaries), and as long as the trustee uses his or her discretion to declare the income as an extraordinary dividend. (The trustee can still use the income for the benefit of the trust, for example by purchasing other properties, a way of life, etc.)
Thus, the current owner (s) of the property would have a non-ceding, irrevocable and discretionary trust that is not self-settled by a third party settlor, and the settlor appoints the current owner as beneficiary. The current owner would then sell the property to the trust and register that sale with the county without triggering a re-appraisal under Proposition 19.
The heirs of the current owner can be added to the trust at any time. With this type of trust, the trust retains ownership of the property at all times, ensuring that any capital gains that occur on a future sale to a third party belong to the trust and not to the heirs. Although the trust has the same basis as the current owner (s), this is not a problem for the trust because under Section 643 (a) (3) of the Internal Revenue Code, if the capital gain is added to the corpus and declared by the trustee to be an extraordinary dividend, no capital gain occurs. This means that neither the heirs nor the Trust will have to pay capital gains tax when the property is sold.
This highly specialized trust is copyrighted 58 times and owned by Platinum Trust Group. You can read more about how it can help you lower taxes and have rock-solid asset protection by watching the live replay on www.PlatinumTrustGroup.com/AAGLA.
Gina Gaudio-Grace, PhD, JD is a retired lawyer, graduated from the Faculty of Law of Notre Dame (1991), former editor-in-chief of Notre Dame Law Review, and holds a doctorate in entrepreneurship and business strategy . Ms. Gaudio-Grace is also Director of Operations and Director of Business Development for Platinum Trust Group. Gina and her team of trust advisors and tax specialists are available to consult with you to determine if this exclusive trust meets your needs.