In California, when siblings jointly inherit a property, they are presented with multiple alternatives to allocate the asset among themselves. One such method is for one sibling to acquire the other siblings’ stakes in the property. However, if done incorrectly, this approach may trigger a property tax reassessment, leading to a substantial increase in property taxes.
In this blog post, we will delve into the utilization of third-party loans as a strategy to buy out the inherited property shares of siblings, while concurrently safeguarding the property tax basis.
Property Tax Reassessment and Exemptions for Transfers between Family Members in California
When real estate is transferred between siblings in California, it is subject to a property tax reassessment. This means that the property’s tax basis will be adjusted to reflect its current market value, which can result in significantly higher property taxes.
However, transfers of real estate from parent to child or grandparent to grandchild are excluded from reassessment under Proposition 19 (and the earlier versions: Proposition 58 and Proposition 193), respectively. This means that the property’s tax basis can be preserved in accordance with the Board of Equalization’s rules.
If the higher property taxes resulting from a reassessment are too much for one sibling to afford when transferring real estate between siblings in California, they may consider a third-party loan to buy out their sibling’s shares, allowing for the transfer to be seen as a parent-to-child transfer and qualify for Prop 58 or Prop 19 tax relief, ultimately preserving the property’s tax basis.
Third-Party Loan from HCS Equity
When siblings use a third-party loan to buy out each other’s shares of an inherited property, the loan is actually secured by the irrevocable trust or estate itself. A private loan made to an irrevocable trust or estate allows trustees or administrators to borrow against real estate assets owned by the trust or estate. This allows for the property transfer to ultimately be seen as a parent-to-child transfer, which qualifies for Prop 58 or Prop 19 tax relief. As a result, the property’s tax basis can be preserved and the siblings can avoid a property tax reassessment.
Tips for Siblings Who are Considering a Buyout of an Inherited Property in California:
First and foremost, it’s important for siblings to communicate openly and honestly with each other about their individual needs and desires for the inherited property. This can help prevent misunderstandings and conflicts down the road.
If siblings are having difficulty reaching an agreement on their own, they may want to consider hiring a mediator to help facilitate the conversation and find a mutually agreeable solution.
Finally, siblings need to consult with their attorney and HCS Equity to ensure that they are making informed decisions and that all legal and financial requirements are being met.
In conclusion, navigating a sibling buyout of an inherited property in California can seem overwhelming. However, with the right tools and resources, siblings can successfully divide the asset while preserving the property tax basis. If you’re considering a sibling buyout in California, speak to HCS Equity, the leading private lender, to help guide you through the process.