For many people, their home is their biggest asset and we help homeowners ensure their biggest asset is protected.
There are 3 issues homeowners need to address in their estate plans:
- Title
- Capital Gains
- Property taxes
How is Title Held
Most people don't have a copy of their grant deed to their home. That's ok - we will pull the grant deed from the County Recorder's Office prior to your Family Wealth Planning Session.
Why is this important? How the title to your house is important, especially for a married couple. Our goal is to avoid probate, minimize unnecessary taxes, and ensure your wishes are carried out. There are 5 common ways title is held in California:
- As a single person
- As a married person as their sole and separate property
- Community property
- Community property with right of survivorship
- Joint tenancy
The first 3 types of title don't avoid probate at all, which may results in tens of thousands of unnecessary fees. The 4th and 5th forms of title only avoid probate upon the first death but doesn't avoid probate upon the second death. Further, the last form of title may not offer the best tax advantages for a married couple.
Unfortunately, we have encountered so many people who thought title was held in one way but in reality, the title was completely different. This is one reason why we review the grant deeds of all property, so we can catch these issues rather than relying on memory.
Capital Gains
Another potential concern for homeowners is whether they or their heirs would have to pay any capital gains taxes if their beneficiaries decide to sell the house.
When you purchase a house, the purchase price becomes your "basis" or the base value of the property. When the property goes up or appreciates in value, that is a "capital gain" - however you are not taxed on that gain until the property is sold. Then, you will pay income taxes for the capital gain earned as a result for the sale. For example, you purchased a house in 1980 for $300,000. In 2020, you sell that house for $1,300,000. You will have to pay capital gain taxes on that sale of $1,000,000 (the difference between the purchase price and the sale price).
If you give the property away while you are alive, the person receiving the house assumes your basis. So, you purchase a house for $300,000. In 2020, you gift the house to your adult child when the house was worth $1,300,000. The adult child who owns the house now has a basis of $300,000. If they sell the property in 2021 for $1,4000,000, then they will have to pay capital gains taxes of $1,100,000.
However, if you wait until you pass away before gifting the house, then the property receives what's called a step up in basis. You purchase the house in 1980 for $300,000. You pass away in 2020, leaving the house to your adult child when the house is worth $1,300,000. The property's basis receives a "step up" to $1,000,000. The adult child who now owns the house has a basis of $1,300,000. If they sell the property in 2021 for $1,400,000, they will have to pay capital gains taxes of only $100,000 (which may be within the exemption if the property is their personal residence).
Even if the beneficiaries don't intend to sell the house, circumstances change. We always recommend minimizing taxes whenever possible, just in case.
Proposition 13 - Property taxes
Proposition 13 is an amendment of the Constitution of California enacted during 1978, by means of the initiative process. Proposition 13 limits reassessment of property values when determining property taxes.
For example, you purchase a house in 1980 for $300,000. Your assessed value starts at $300,000. Each year, the assessed value can't rise more than 2% even if the market value of the property is rising faster. Over time, the assessed value becomes much lower than the market value, keeping the property taxes low.
Property taxes are reassessed any time the property is sold, gifted, or transferred with some exclusions. Common exclusions relevant to estate planning is transfers between spouses, and the parent-child exclusion.
The parent-child exclusion was recently modified in 2020 by Proposition 19. Essentially, transfers between parent and child are no longer excluded, except when the parent is transferring their principal residence and the child uses that property as their principal residence.
Because of this limitation, it is important to know the intent of the child inheriting the property. Do they intend to sell the property when they inherit it? If so, then we are not as concerned about property taxes and more concerned about capital gains. Do they intend to live in the house? Then we are more concerned about keeping the property taxes low. Do they intend to use the property as investment income? There may be other strategies we can use to minimize the reassessment of the property taxes.