As Proposition 19 was passed by California voters back in November with only 52 percent of voter approval, attorney Samuel B. Ledwitz wants to make sure you are aware of how the law will work and its pitfalls.
Founding partner of Bezaire, Ledwitz and Associates, an estate planning law firm, Ledwitz said the initiative affects property tax as it relates to parent-to-child transfers, adding it affects both income properties, like apartment buildings or industrial or even residential properties that are being rented out, and normal every day primary residences.
But why was this initiative put on the ballot in the first place? Ledwitz said it has to do with California’s decades-long battle over how property taxes are to be assessed.
“In this case, Proposition 58 was passed by the voters in 1986 with 75 percent voter approval,” he said. “Prop. 58 said that a primary residence, regardless of value, could go from parent to child with no reassessment in property taxes. It also said other secondary properties of up to $1 million of assessed value could go from parent to child with no reassessment in property taxes. Up until recently there would be no reassessment in property taxes.”
So, how does Prop. 19 affect the average homeowner? Ledwitz explained.
“Let’s say you bought your house for $100,000 and you’re paying 1 percent property tax,” he said. “At that rate your property tax would be $1,000 per year. Let’s say by the time you pass away the house is worth $1 million. One percent of $1 million is $10,000. So, for someone inheriting that property, they might not be able to afford the increase in tax and it might force a sale of the property.”
He added most Californians are not aware of how the law works and might be in for a bit of a shock down the road.
“The property gets reassessed the very second you die,” Ledwitz said. “It might take your kids maybe six months to clean out the house and sell it. But that big property tax bill is starting to accrue the day you pass away, hitting the middle class and the poorer class a lot harder than the wealthy.”
As the law affects parent-to-child transfers, Ledwitz said it wasn’t well thought out nor practical in its conception, namely because while the assessment is avoided on $1 million of market value above the parents' assessed property tax value, if a child makes the inherited home his or her personal residence, that is not taking into account families with multiple children.
“What happens if you have two or more kids?” Ledwitz asked. “They both probably don’t want to live in the house together under the same roof, making it all their primary residence. You’re going to see people who normally would have liked to keep it in the family now have to sell.”
Ledwitz also said that since the added assessment kicks in without warning, properties that might have been in families for generations are in risk of having to be sold off for those who cannot avoid the tax bill.
“Let’s say I have a rental property,” he said. “I’m using that to pay all my bills. The second I die and I want the property to go to the kids, there is no exemption at all. It gets fully reassessed. Again, the kids might be forced to sell it because there are no longer the profits coming from the rental property.”
----- BUT there is some good news for homeowners in regard to Prop. 19, Ledwitz said. To save properties, there are things that can be done ahead of time, he added.
“There are things called entities,” Ledwitz said. “And entities can get around Prop. 19. For example, if you created an LLC -- or limited liability company -- we can do some transfers. We can avoid full reassessment of the non-primary residence property if we do an LLC before Feb. 16 when the law kicks in. If we do it after that we can probably still avoid up to 98 percent of the reassessment on these non-primary residences such as rental properties, commercial properties or industrial properties.”
The LLC has other benefits besides just helping out in the Prop. 19 realm, including some tax benefits, Ledwitz said.
“The LLC will make sure we can protect it from that reassessment,” he said. “That way there’s no increase in property tax. The LLC will also add asset protection. If someone slips and falls on your property, for example, they can’t sue you for your primary residence. And if you’re wealthy enough, the LLC will provide a discount for estate tax valuation, up to about 35 percent. If we take $1 million in value and put it in an LLC, the IRS will see about $650,000 of value.”
But in general, Prop. 19 just angers Ledwitz.
“A guy like me knows to avoid the pitfalls,” he said. “But how many people out there know to contact an attorney? So, the wealthy have already by-passed the system. That’s why this is unfair. It definitely hurts the little guy.”
Persons who would like to discuss any aspect of a proper estate plan can phone the Law Offices of Bezaire, Ledwitz and Associates at (626) 398-0100 or log onto www.SmartEstatePlans.com.