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"Step-Up in Basis" is a tax provision that allows the value of an inherited property to be adjusted to its fair market value at the time of the owner's death, rather than the original purchase price. This is particularly important in estate planning because it can significantly reduce the capital gains tax burden when the property is sold. For example, if a property was purchased decades ago at a much lower price and has appreciated in value over time, a step-up valuation helps reset the taxable base, which can save heirs substantial taxes on the eventual sale of the property.
Hiring a professional real estate appraiser is essential for establishing an accurate step-up in basis. An appraiser provides a fair market value assessment of the property at the time of the original owner's death, which becomes the "stepped-up" value. This official valuation is critical not only for the IRS but also for estate settlement and potential property sales. Without an accurate appraisal, heirs risk overestimating or underestimating the property's value, which could lead to complications or disputes with tax authorities. By investing in a professional appraisal, estates can benefit in multiple ways. A detailed and accurate appraisal can minimize potential tax liabilities for heirs by ensuring they have the correct valuation to report to the IRS. It also provides clarity during estate planning, helping executors and beneficiaries understand the true worth of the estate. This process not only ensures compliance with tax laws but also empowers heirs with the financial knowledge needed to make informed decisions regarding the inherited property.
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Proposition 19, passed in California in November 2020, brought significant changes to property tax rules, particularly affecting private party real estate transactions and estate appraisals. One of its key provisions allows homeowners over the age of 55, severely disabled individuals, or victims of natural disasters to transfer their property tax assessments to a new home of equal or lesser value up to three times, ensuring that they can retain their lower tax base when downsizing or relocating. This is especially relevant for estate appraisals, as it adds complexity to determining tax implications when properties change hands.
For inherited properties, Proposition 19 introduced stricter guidelines. Prior to its passage, children or grandchildren could inherit a parent's home while maintaining the existing property tax assessment, regardless of whether they lived in the home. However, under the new law, in order to keep the low tax base, the heir must move into the property and establish it as their primary residence within one year of inheritance. Estate appraisals now play a crucial role in determining the property's fair market value for tax reassessment purposes if the heir does not meet these requirements. For private parties and estate planners, the impact of Proposition 19 cannot be understated. The change in tax reassessment rules means that estate appraisers must take a careful approach to valuing properties, particularly those being passed down through inheritance. It is essential to understand the long-term tax consequences for heirs, ensuring they are prepared for potential increases in property taxes or considering strategies to retain the favorable tax base. This shift underscores the importance of thorough and accurate real estate appraisals in today's evolving tax landscape. Reprinted with permission from Gustavo Gonzalez, Valley View Properties, San Jose, CA
Avoid Paying Increased Property Taxes When Moving Are you over 55 and worried about the tax implications when you purchase or relocate to a new location? If so, you aren't alone. Individuals 55 and over find themselves approaching retirement age and becoming the empty nesters: Their housing needs change along with their lifestyles but inflation and taxes keep increasing. That is where Proposition 60 and Prop 90 can help. What is Prop 60? Proposition 60 is a constitutional amendment, approved by California voters, that provides property tax relief under certain circumstances. Prop 60 allows qualifying property owners to replace their primary residence with a new home of equal or lesser value and maintain their same tax base. With Prop 60, what is transferred is the Proposition 13 or "base year value" of the old home, which can be substantially less than the current market value of either home. How can I qualify for Prop 60? Both the original home and the new home must be located in the same county. Both the original and replacement properties must be your primary residence. Both properties must be eligible for the Homeowner's Exemption or Disabled Veteran's Exemption. The seller or spouse residing in the home must be at least 55 years old when the original property is sold. The replacement home must be of equal or lesser value than the current market value of the original home. There is some wiggle room within this rule, depending on when the new property is purchased. For the purchase of a home that occurs 1 to 2 years after the sale of the original home, the "equal or lesser" rule can change slightly. If the replacement home is purchased or moved into within one year you can purchase up to 105% of the value of the original home. If within two years, you can go up to 110% of the value. purchase of the replacement property must be completed within two years of the sale of the original property in order to qualify for Prop 60. Application for tax relief must be filed within 3 years of the purchase of the new home. This is a once in a lifetime benefit. Neither spouse can file again. How do I file for Prop 60 tax relief? Contact your county assessor's office. The assessor will determine if the transaction qualifies and provide you with the claim forms. What is Proposition 90? Prop 90 is an amendment that permits the property owner to carry the benefits of Prop 60 throughout California. Each county in California has the option to accept tax base transfers from other counties, allowing qualifying homeowners more flexibility when planning a move. Counties are not required to participate, and currently there are only 7 counties in California that accept Prop 90. These counties include Los Angeles, Orange, Ventura, San Diego, Alameda, San Mateo and Santa Clara. This number changes, as counties have the option to repeal their participation, so check before making a move. Prop 60 and Prop 90 are great extensions of Proposition 13, which was the initial break offered to the property tax paying public. If you think either might be something that will work for you, please consult your tax advisor or your county assessor for details. |
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Sonja Troncoso is a Certified Residential Appraiser with over 22 years of experience. Categories
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