Gifting Real Estate and the cost basis+assessment implications

blackmountain

New Member
Jurisdiction
California
Hi, question about estate planning and real estate gifting and taxes.

If I inherit property from my Dad when he dies, I'll get the stepped-up cost basis, and prior to prop 19 in California would also keep the low property tax assessment.

Prop 10 changes that a bit. Basically the property gets reassessed and my property taxes will be much higher. There are some exceptions or thresholds, but that's a different matter.

My understanding is that until February 15th (again, specific to California here), he can give up to $1,000,000 of property to me and *I think* I'll get the stepped up cost basis AND the low property tax assessed value.

The main goal of course being to keep the low property taxes AND get the stepped up cost basis. What I'm not entirely clear about is if both of those things are true and how the $1,000,000 threshold plays into it. Does anyone know?

Yes, I know, see an estate attorney, and I did and it cost me $500 for one hour, but I didn't get to ask about this and I'm hoping someone here knows.
 
Didn't you have this discussion already? Maybe on another site?

My understanding is that until February 15th (again, specific to California here), he can give up to $1,000,000 of property to me and *I think* I'll get the stepped up cost basis AND the low property tax assessed value.

If you are talking about federal income tax on a gift of real estate your basis when you sell it would be what your father paid for it when he bought it, adjusted (or course) for capital improvements, costs of sale or purchase, etc.

As for assessed value, I have no clue.
 
My understanding is that until February 15th (again, specific to California here), he can give up to $1,000,000 of property to me and *I think* I'll get the stepped up cost basis AND the low property tax assessed value.

If he gives you a property worth $1 million while he's still alive then for federal tax purposes he's made a gift of $1 million to you for which he will need to file a federal gift tax return and reduce his lifetime unified credit against estate and gift taxes by the $1 million value of the gift (less the $15,000 gift tax exclusion if that has not yet been used) or, if there is not enough unified credit left to cover the $1 million gift then he'll have federal gift tax to pay, which gets very expensive. California does not have a gift tax.

On your side of things, you do NOT get a stepped up basis with a gift given to you during the donor's lifetime. What you get is the same basis in the property that he has in it. That's known as carry over basis. In short, to get the stepped up basis the donor has to die and pass the property to you via a will, revocable living trust (or other grantor trust), or beneficiary deed. California income tax follows the federal law in this regard.


The main goal of course being to keep the low property taxes AND get the stepped up cost basis. What I'm not entirely clear about is if both of those things are true and how the $1,000,000 threshold plays into it. Does anyone know?

So what it comes down here is that to get both the benefit of the stepped up basis and the low prop 13 property tax assessment value your dad would need to die before February 15 and pass the property to you after death by will, grantor trust, or beneficiary deed. Otherwise, he can give you the property before on or before Feb. 15 and you get the lower property tax but have the low income tax basis (and he has the gift tax to deal with), or you can wait until he dies and get the stepped up income tax basis (and the property is included in his estate for federal estate tax purposes) but if the death is after Feb. 15 you'll lose the prop 13 lower property tax benefits. For the exact timing of the California law changes you'll want to talk to a California estate planning or tax attorney.
 
If he gives you a property worth $1 million while he's still alive then for federal tax purposes he's made a gift of $1 million to you for which he will need to file a federal gift tax return and reduce his lifetime unified credit against estate and gift taxes by the $1 million value of the gift (less the $15,000 gift tax exclusion if that has not yet been used) or, if there is not enough unified credit left to cover the $1 million gift then he'll have federal gift tax to pay, which gets very expensive. California does not have a gift tax.

On your side of things, you do NOT get a stepped up basis with a gift given to you during the donor's lifetime. What you get is the same basis in the property that he has in it. That's known as carry over basis. In short, to get the stepped up basis the donor has to die and pass the property to you via a will, revocable living trust (or other grantor trust), or beneficiary deed. California income tax follows the federal law in this regard.




So what it comes down here is that to get both the benefit of the stepped up basis and the low prop 13 property tax assessment value your dad would need to die before February 15 and pass the property to you after death by will, grantor trust, or beneficiary deed. Otherwise, he can give you the property before on or before Feb. 15 and you get the lower property tax but have the low income tax basis (and he has the gift tax to deal with), or you can wait until he dies and get the stepped up income tax basis (and the property is included in his estate for federal estate tax purposes) but if the death is after Feb. 15 you'll lose the prop 13 lower property tax benefits. For the exact timing of the California law changes you'll want to talk to a California estate planning or tax attorney.


Thanks, to both of you. I posted in another forum on here I think, as well as a craigslist discussion forum.

Ultimately what I've determined/learned, is that it boils down to whether an inherited property is going to be lived in, rented, or sold. If I inherit a property after Feb 15 and I live in it, I get the stepped up cost basis AND no reassessment. If I inherit it and don't live in it (rent it out), I keep the stepped up basis but get reassessed...which would throw the math heavily against being able to profitably rent it out. Or, if it's sold then I get the stepped up cost basis and the reassessment is basically irrelevant.

In my family's case there are something like 6 properties, with two of them totaling around $1,000,000 in current value planning to be kept after my Dad dies.

..."The second part of the measure eliminates the ability for a home to pass from a parent to a child or grandchild without reassessing the home value, unless it's the child's or grandchild's primary residence. If the child or grandchild doesn't live in the inherited home and instead chooses to rent it out, the tax value can be reassessed.

Currently, family members can transfer a home and the property value won't be reassessed. They can also transfer other rental or commercial properties and exempt up to $1 million of the assessed value. This passage eliminates the aforementioned loopholes."

So, if the two properties worth $1MM (total) are going to be kept, losing the stepped up basis isn't relevant but keeping the low property tax assessment will be important. I think the answer is that those two properties are gifted to me prior to Feb 15, I'll lose the stepped up basis but they won't get reassessed.
 
If I inherit a property after Feb 15 and I live in it, I get the stepped up cost basis

You get the stepped up cost basis no matter when you inherit. What you also get is the gain exclusion of $250,000 ($500,000 if married) when you sell it after living in it for two years out of the next 5.
 
So, if the two properties worth $1MM (total) are going to be kept, losing the stepped up basis isn't relevant but keeping the low property tax assessment will be important.

Unless you plan to keep those properties until you die, then indeed the loss of the stepped up basis will matter. The issue then is whether keeping the low property tax assessment saves you more than you lose with the carry over basis.
 
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