Proposed ballot measure would cut California’s inherited property tax breaks

Reporting from Sacramento —  California law gives children who inherit their parents’ homes a tax break that keeps their property taxes low — even if the heirs don’t live there.

The provision, as detailed in an August Los Angeles Times investigation, has allowed celebrities, out-of-state professionals and other wealthy heirs to collect large sums in rental income from their parents’ homes while paying small property tax bills. But under a new plan from a Bay Area lawmaker, that benefit would come to an end.

Sen. Jerry Hill (D-San Mateo) is introducing a ballot measure to require children who receive the state’s property inheritance tax break to live in their parents’ homes. Doing so would rein in what Hill called “abuses” of a policy established more than three decades ago designed to help children retain ownership of family property.

“People, I think, are taking advantage and gaming the system,” Hill said.

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Hill said The Times’ reporting inspired his proposal. The investigation found that as many as 63% of the homes inherited under the system in Los Angeles County were used as second residences or rental properties last year, with a similar trend seen in a dozen other coastal counties.

In general, property taxes in the state are capped under Proposition 13, which created a tax system that calculates a property owner’s bill based on purchase date, not what the property is worth on the open market. California also allows children to inherit the property tax benefits their parents have received through Proposition 13, and is the only state in the country to provide such a tax break.

Beneficiaries have included actors Jeff and Beau Bridges and their sister. The trio owed $5,700 last year in property taxes for their parents’ four-bedroom Malibu beach house, but would have had to pay an additional $300,000 in taxes had the home been reassessed when they inherited it in 2009, according to a Times calculation. Earlier this year, the siblings put the property on the rental market for $15,995 a month.

The Times found similar examples in Los Angeles, Santa Barbara and San Francisco where children were receiving monthly rental incomes far in excess of their annual property tax bills for their parents’ homes.

Voters approved the inherited property tax break in 1986, eight years after Proposition 13’s passage. Under current law, parents can give primary residences to their children, stepchildren, adopted children, or sons- or daughters-in-law without triggering a reassessment in value no matter how much the home is worth. Parents also can transfer their businesses, farms, second homes and rentals if the total assessed value is less than $1 million.

Hill’s proposal would require heirs move into their parents’ homes within a year of inheriting the property to qualify for a lower tax bill. If they don’t, the property would be reassessed at its current market value, resulting in larger property tax bills. The ballot measure would still allow children to receive the tax benefits for their parents’ businesses or farms if the assessed value was less than $1 million.

The ballot measure is the second that’s been proposed to change the inherited property tax break. The California Assn. of Realtors is considering sponsoring an initiative for November 2020 that would further curtail the benefit. Under that effort, those who inherit commercial properties wouldn’t qualify for the tax break. Heirs would also have to live in their parents’ homes and the benefit would be capped at $1 million in assessed value.

A financial estimate by the state’s nonpartisan Legislative Analyst’s Office found the Realtors’ proposal could increase property taxes for 40,000 to 60,000 inherited properties each year, raising $2 billion in revenue annually over time. The Realtors’ initiative would use the revenue to fund an expansion of property tax benefits for those 55 and older.

No fiscal analysis was immediately available for Hill’s proposal, but he said local governments needed more tax dollars to address rising costs for services as property changed hands over generations.

“This is depriving cities and counties of the resources that they need to provide the services for those homes that are now being rented,” Hill said of the existing tax break. “It’s important that we close the loophole.”

Hill’s bill, which will be Senate Constitutional Amendment 3, requires the approval of two-thirds of both houses of the Legislature for it to be placed on the March or November 2020 ballot.

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UPDATES:

4:51 p.m.: This article was updated with the bill number, Senate Constitutional Amendment 3, for the ballot measure.

This article was originally published at 4:25 p.m.