She owns a property in California that has substantially appreciated value now and yet paying only a fraction of the property tax rate based on original purchase. If she gives the property to me before she dies, will the property tax be as low as what she is paying now as opposed to leaving it to me at death and the stepped up basis rule applies? Thank you.
There is a specific exemption from reassessment of real property taxes for transfers from a parent to his or her child, whether during the parent's lifetime or at the parent's death.
That being said, making a gift of real estate to a child prior to death has many negative results, especially if the property has been owned for a long time and has a lot of equity built up in it. This is because a gift of the property is also a gift of the parent's "cost basis" for capital gains income tax purposes, which means that, on the parent's death, there is no "step up" or increase in the cost basis for the child, leaving the child with potentially significant income taxes if the property is sold.
For example, if your mother's cost basis in the property was $100,000, established 20 years ago in 1992, and the property is now worth $500,000, there would be a taxable capital gain on the $400,000 of equity if the property was sold by you after your mother's death. These taxes would be up to 23% to 24% of the equity, including both federal and California state income taxes.
On the other hand, if the property was held by your mother in a living trust and she passed it on 100% to you at her death, the new cost basis in the property would become $500,000 instead of $100,000, meaning that the property could be sold for $500,000 with no capital gains income tax.
Also, if you are contemplating this in order to qualify your mother for Medi-Cal (state paid long term care), making a transfer like this improperly could cause a loss of Medi-Cal eligibility for several months or years, defeating the whole purpose. You should consult with a qualified Elder Law attorney to discuss proper planning options if this is your intent.
Please remember to mark what you believe to be the best answer to your question. This answer is provided by estate planning attorney Robert P. Bergman, with offices in San Jose, California. Mr. Bergman is a Certified Specialist in Estate Planning, Trust and Probate Law (State Bar of California Board of Legal Specialization), and has been practicing since 1980. This answer does not create an attorney-client relationship, and is only intended to provide general legal advice within the limits of the question asked. If you wish to create an attorney-client relationship for specific legal advice, it will be necessary to enter into an engagement for legal services. More general legal information about wills, living trusts, and estate planning can be found at Mr. Bergman's main website at www.lawbob.com, or his information website at www.lawbob.net. Mr. Bergman also offers free living trust seminars and wealth preservation seminars at his offices in San Jose. For those unable to attend a live seminar, an online living trust seminar may be viewed or downloaded at www.freelivingtrustseminar.com.
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Your answer depends on HOW this is done and whether or not your mother retains an interest in the home. Depending on the answer to these questions, you may have gift tax and income tax repercussions, as well. Needless to say, in something this critical, you are going to need to meet with an attorney to make sure that you cover all of the bases and set things up properly so this does not come back to haunt you.
*** LEGAL DISCLAIMER I am licensed to practice law in the State of Michigan and have offices in Wayne and Ingham Counties. My practice is focused in the areas of estate planning and probate administration. I am ethically required to state that the above answer does not create an attorney/client relationship. These responses should be considered general legal education and are intended to provide general information about the question asked. Frequently, the question does not include important facts that, if known, could significantly change the answer. Information provided on this site should not be used as a substitute for competent legal advice from a licensed attorney that practices in your state. The law changes frequently and varies from state to state. If I refer to your state's laws, you should not rely on what I say; I just did a quick Internet search and found something that looked relevant that I hoped you would find helpful. You should verify and confirm any information provided with an attorney licensed in your state.
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Estate Planning Attorney
I agree with Mr. Bergman. It could be very foolish if your mother gifts you the property just to save property taxes and you end up having a low income tax basis on it. Your mother can leave you the property under a will or a trust and you can still keep the low property tax basis - but since you will have inherited the property, your income tax basis readjusts (saving you income taxes if you ever sell the property).
Assuming that the house is worth more than $150,000 it makes more sense to have your mother create a trust and leave the property to you under her trust than it does for her to leave it to you under her will (probate fees would most likely be high).
Have your mother contact a competent estate planning lawyer to assist her.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
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