Have you recently gifted property to your children because of California Proposition 19?
Here’s what to do next.
Many parents have recently gifted properties to their children because of the recent passage of Proposition 19 in California, which places significant limitations to transfer California property between parents and children without property tax reassessment. If you have recently gifted property to your children before February 16, 2021, here are next steps to take as well as a list of “do’s” and “don’ts.”
Contact an Appraiser or Broker
The property(ies) that were gifted need to be documented to substantiate the gift value. Your CPA/accountant will guide you in what he/she needs in order to file a Gift Tax Return. Some accountants will want certified appraisals while others may accept broker opinions. In either situation let the appraiser/broker know to value the property(ies) as of the date of the gift. For example, if a property was transferred on February 10, 2021, tell the appraiser/broker you need a valuation date of February 10, 2021.
File a Gift Tax Return
Please contact your CPA to advise him/her to file a Form 709 gift tax return for the properties you gifted. Provide them with the documentation they require so he/she has the gift value. You are required to file Form 709 with the IRS if you have gifted any assets (of any combination) worth over $15k in a given year to any one person.
Obtain an EIN for Irrevocable Trusts and LLCs
If Irrevocable Trusts and/or LLCs were formed in connection with the gifting, ask your CPA to obtain an EIN for those entities. You must file an income tax return every year for these entities if there is any income to declare.
Sign Rental Agreements
If your lawyer advised you to consider paying rent on a property that you gifted to your children in order to minimize or avoid death taxes down the road, enter into a rental agreement with your child(ren), who are now your landlord! If you need assistance in preparing your rental agreement, please feel free to contact our office.
Open a Bank Account for Irrevocable Trusts and LLCs
If the gifted property(ies) are rentals and were transferred into an Irrevocable Trust, please contact your bank to set up a bank account in the name of the Trustee of the Irrevocable Trust. If, however, Irrevocable Trusts were formed and an LLC was also formed with the Trustees of the Irrevocable Trusts as members, you need only form a bank account in the name of the LLC. (This is because it is the LLC that will ultimately collect the rents.)
Give Notice to Tenants of the New Ownership
If the gifted property(ies) are rentals, advise your tenant(s) that checks should be made payable to the Trustee of the Trust or to the LLC, as the case may be for you.
Do Not Commingle Funds
If the gifted property(ies) are rentals and were transferred into an Irrevocable Trust/LLC, make sure all income is paid to the Trust/LLC account and all property expenses are paid out from the Trust/LLC account. Do not commingle personal or other entity funds. (For example, do not deposit rental income into your personal account and/or pay property expenses from your own personal account.)
Expect Property Taxes to Get Reassessed due to Delays in Prop 58 Rulings
Expect a delay from the Assessor’s Office in getting Prop 58 (parent to child exclusion) forms reviewed and ruled upon. The timeframe is largely unknown, but we can expect it could take up to a year, if not longer. This means that your property taxes may be reassessed in the meantime. We advise that you pay the full amount due on your property tax bill. Once the Prop 58 is approved, the Assessor’s Office will issue you a refund for the amount that was improperly reassessed, plus interest.
Please contact our office or your attorney should you have any questions about your specific situation.
Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.