Prop 19 and the inherited house: when the property tax bill jumps

The tax bill is the part nobody warned them about. The will got read, the deed got recorded, and then an envelope from the assessor showed up and the annual property tax on a Fruitvale bungalow went from something that fit in a coffee can to something that needs a second income.

I'm going to walk through why, with the dates, because the dates decide it. This is a retired paralegal's general explanation and not tax advice. The numbers in your case come from the assessor and, if the money is large, from a CPA.

February 16, 2021

Before that date, a parent could leave a child a house in California and the child kept the parent's Proposition 13 assessed value. Nobody asked who lived there. The child also got a separate allowance for other property. That was Proposition 58, and it's the reason so many Oakland rentals are still taxed on 1980s values.

Proposition 19 replaced it for transfers on or after February 16, 2021. The Board of Equalization's Prop 19 page is the official version. I still keep it open when I explain this. The short form is that the parent-child exclusion now has two conditions and a cap.

Condition one: it was the parent's principal residence

The exclusion applies only to the home the parent actually lived in. The duplex in Richmond the parent rented out, or the second house in Hayward, gets reassessed to market value as of the date of death.

Condition two: it becomes the child's principal residence

The child has to move in and make it home. The assessor checks this through the homeowner's exemption. The child has to file a claim for the homeowner's exemption (or the disabled veterans' exemption) within one year of the transfer date. Miss that year and the exclusion is gone, even if you have been sleeping in the house the whole time.

The transfer date, for an inherited house, is the date of death. Not the date probate closed. Not the date the deed recorded. I have sat across from people who assumed the clock started when they got the keys. It had run out while the estate was still in the creditor window.

The cap

Even when both conditions are met, the exclusion has a ceiling. Take the parent's factored base year value, which is the original assessed value grown by the Proposition 13 limit each year. Add an amount that started at one million dollars and gets adjusted for inflation every two years; the BOE page carries the current figure. If the market value at death is below that sum, nothing changes. If it's above, the excess gets added to the taxable value.

A worked example

Say a couple bought a two-bedroom bungalow off High Street in 1978 for $65,000. Under Proposition 13 the assessed value could rise at most two percent a year, so by the time the surviving parent dies in 2026 the factored base year value is somewhere around $170,000. Call the tax rate, with the local bonds and parcel charges folded in, roughly 1.2 percent for the sake of arithmetic. The annual bill is around $2,000.

Now say the house would sell for $950,000.

Scenario one. The daughter moves in and files her homeowner's exemption within the year. The cap is $170,000 plus roughly a million, call it $1,170,000. The market value is below that. Her taxable value stays at about $170,000 and her bill stays near $2,000.

Scenario two. Same daughter, same house, but she lives in Walnut Creek and keeps the bungalow as a rental. No exclusion. The taxable value resets to $950,000. At the same rough rate, the bill is about $11,400 a year. That is the jump.

Scenario three. The house is in Piedmont and would sell for $1,600,000, and the daughter moves in. Market value exceeds the cap by about $430,000, so that gets added. Taxable value becomes about $600,000, bill roughly $7,200. Still a jump, but smaller than the full reset.

The rate is a placeholder. Your actual rate is on your bill and on the Alameda County property tax portal.

The supplemental bills

The reassessment is effective as of the date of death, but the assessor finds out later. When they catch up, they issue a supplemental assessment for the difference between the old value and the new one, prorated from the date of death to the end of the fiscal year, and often a second one for the following year. These come as separate bills, outside the regular installments, and a lender's impound account doesn't pay them. The heir who set up autopay on the old bill and stopped opening the mail gets a delinquency notice. I have seen the face that goes with that notice.

How the assessors process it

Both counties want to hear about the death. The form is the Change in Ownership Statement, Death of Real Property Owner, due to the assessor within 150 days of the date of death whether or not probate has started. The Alameda County Assessor and the Contra Costa County Assessor both post it, along with the claim form for the parent-child exclusion, which is a separate filing with its own deadline. Full relief needs the exclusion claim on file within a set period after the transfer or before the house is sold to a third party, whichever comes first. The assessor's staff will tell you the current deadlines. Unlike lawyers, they answer the phone.

Expect a questionnaire from the assessor. Answer it. Silence gets treated as no exclusion.

Why heirs sell instead of rent

Go back to scenario two. A rental that nets, say, $1,800 a month before the tax jump nets around $1,000 after it, and that's before the roof, the tenant turnover and Oakland's rent ordinance. The heir in Walnut Creek is being asked to run a thin-margin business on a house she didn't choose, with two siblings watching the books.

A lot of them decide to sell the house for cash before the reassessment lands in the mailbox, or at least before the supplemental bill does. The sale doesn't undo the reassessment; the date of death already happened. What it does is put a stop to carrying a house nobody meant to hold.

The income tax side is usually kinder than people fear. Inherited property takes a stepped-up basis to its date-of-death value, so a sale near that value produces little gain. The Franchise Tax Board's page on selling a home covers the California treatment.

What I tell them

If it's an inherited rental, or a house no child is going to live in, and the reassessment is already dated to the funeral, I'd get a number from local cash home buyers in the East Bay in the same month you file the change in ownership statement. Then decide with the real tax bill and a real offer on the same table. If the reassessment date on the assessor's notice doesn't match the date of death, call the office before you do anything else.