How To Save Your Heirs Money On Property Taxes

In California, if you will or sell your house to your children, there is no property tax reassessment as there would be if you were to sell it outright.  However, if you have two children and will the house at 50% to one and 50% to the other, and one sibling forces the other to buy them out, this savings goes out the window.  Because of the forced sale, the purchasing sibling will have to pay property tax after a reassessment.  This would, no doubt, raise that sibling’s tax liability by thousands.  There are, however, ways to avoid this scenario.

You could simply will your house to the child who needs it the most.  This could cause an unfair distribution of assets and the financial circumstances of your children might well change between the writing of your will and your death.  Therefore, the child who needs the house most now, might not be the child who needs it most upon your death.  You could simply will the house to one child and all other assets to the other.  Again, this may lead to an unfair distribution of assets.  Lastly, you can set up a revocable living trust and give the trustee discretion to mortgage the house so the property can go to the sibling who is the buyer and the seller receives the loan proceeds, equalizing the asset distribution and keeping the property from being reassessed at a higher tax.

Unfortunately, you cannot pass the right to own the house without reassessment to anyone except children.  Therefore, no matter what adjustments or assigns you make in your will, unless you pass the house to one or all of your children, the inheritor will face a reassessed property tax.  Many people have thought that they have come up with ways around this provision, but the tax law in California pretty much has you cold.

That is because of a rule called the step transaction doctrine.  This rule states that any number or steps of transactions made to avoid taxation will be treated the same as a single transaction and will face taxation as such.  For example, if you state in your will that you are leaving your house to your daughter with the intent that she sells it to her daughter (your grandchild), the state will consider this to be one transaction.  That one transaction would be the sale of your house to your granddaughter.  Since grandchildren are not qualified for the exemption of reassessment, the property would be reassessed and your granddaughter would have to pay increased property taxes.  She would not benefit from her mother’s ability to leave the house to her, without reassessment, as her mother did from you.  That is because the transaction would be seen as an attempt to avoid reassessment of the property tax, which would be true.  It is unclear how long your daughter would have to own your house before she could sell it to her daughter without the property tax reassessment, although she should be able to do so at some point.

Remember that we are talking California law here, as an example of how complex property taxation can become.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.

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