Measure Would Close the Legal Loophole Enabling Children and Grandchildren to Profit from Renting Out Homes While Avoiding Today’s Property Tax Rates
Assemblymembers Rob Bonta, Laura Friedman, Mike Gipson and Bill Quick Coauthor Proposed Constitutional Amendment
December 5, 2018 - SACRAMENTO – State Senator Jerry Hill introduced legislation on Tuesday to ensure that California’s tax break on inherited residential property benefits only 
individuals who live in the home left to them by parents or grandparents.
Senate Constitutional Amendment 3, would require a two-thirds majority vote by both houses of the state Legislature for the measure to be placed on the ballot in 2020. Senator Hill introduced SCA 3 with Assemblymember Rob Bonta, D-Oakland, as principal coauthor and Assemblymembers Laura Friedman, D-Glendale, Mike A. Gipson, D-Carson, and Bill Quirk, D-Hayward, as coauthors.
“We need to close the legal loophole that has allowed some individuals to dodge thousands of dollars in property taxes while reaping rental income from homes they have inherited and do not use as their primary residence,” said Senator Hill, D-San Mateo and Santa Clara Counties. “The practice robs communities of property taxes that fund vital public services for residents. SCA 3 is about stopping people who game the system and use their residential property inherited from their parents as a cash cow while avoiding their fair share of property taxes.”
An October 2017 report by the state’s Legislative Analyst Office lays out the problem: Typically in California, when a property is transferred to a new owner, its assessed value is reset to its purchase price. But the Legislature and voters created special rules for inherited properties allowing children or grandchildren to inherit their parents’ or grandparents’ lower taxable property value. In 1986, voters approved Proposition 58, a legislative constitutional amendment, which excludes certain property transfers between parents and children from reassessment. In 1996, Proposition 193 extended the exclusion to transfers between grandparents and grandchildren if the grandchildren’s parents are dead. These exclusions apply to all inherited primary residences, regardless of value or income of the beneficiaries. They also apply to up to $1 million in aggregate value of all other types of inherited property, such as second homes or business properties.
The report called the drawbacks from the property tax inheritance break “substantial.” “Hundreds of thousands of families have received tax relief under these rules,” said the report. “As a result, local government property tax collections have been reduced by a few billion dollars per year. Moreover, allowing children to inherit their parents’ lower property tax bill has exacerbated inequities among owners of similar properties. It also appears to have encouraged the conversion of some homes from owner-occupied primary residences to rentals and other uses.”
This summer, the Los Angeles Times detailed the problem in an investigative report that highlighted wealthy and famous families who are renting out inherited homes for thousands of dollars a month and gaining the advantage of added income along with the low tax rates attached to the property once owned by their parents or grandparents.
SCA 3 responds by proposing to modify the property tax inheritance exclusion law. Individuals who inherit property from their parents or grandparents and want to also inherit the assessed value of the property must make that home their primary residence within 12 months of inheriting it. The 12-month period gives the heirs time to decide whether to move into the home and make arrangements based on their decision. If they decide to rent out the home, the property would be reassessed to market rate and the property taxes would be adjusted accordingly.
More resources
Legislative Analyst’s Report:
https://lao.ca.gov/reports/2017/3706/property-tax-inheritance-exclusion-100917.pdf
The text for SCA 3 will be available within 24 hours at:
http:// http://leginfo.legislature.ca.gov/faces//billSearchClient.xhtml
PDF of SCA 3's Introduced Text:
https://sd13.senate.ca.gov/sites/sd13.senate.ca.gov/files/pdf/sca_language_0.pdf
Source: State Senator Jerry Hill
