Between property taxes, insurance complications, maintenance concerns, and California’s unique tax implications, the costs and responsibilities of owning an empty house can quickly become overwhelming. Especially living out of state, the question of what to do becomes more pressing. While you’re hundreds or thousands of miles away… the property is just sitting there. Vacant.
Let’s get your feet back under you. This is the guide for your first steps… what to do first when you inherit a property in California. We’ll also outline some of the most salient tax laws. Ultimately, you’ll be able to put together a quick plan of action.
Understanding What Happens When You Inherit a House in California
The moment you inherit California property, you become responsible for it, whether or not you’re ready. This responsibility includes property taxes, insurance, utilities, maintenance, and compliance with local regulations. For absentee heirs living in other states or countries, these obligations can feel impossible to manage.
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What are The Immediate Concerns to Address?
Property Security
Empty houses can become targets for vandalism, squatters, and theft. No one is regularly checking on the property? Problems can definitely escalate quickly. Then they’ll go unnoticed for months. I know of one property owner who was finally able to visit the home she owned remotely. She was shocked to find an extended family of illegal immigrants living in the house.
Ongoing Costs
It would be great if you could freeze time while you figure everything out. Unfortunately, that isn’t possible. Property taxes, homeowners association fees, utilities, insurance, and maintenance don’t pause while you figure out your next steps. These expenses accumulate monthly. They can drain the estate’s value.
Legal and Financial Deadlines
Probate proceedings, tax filings, and property transfers all operate on strict timelines. Missing deadlines can result in penalties or legal complications.
Maintenance Requirements
California properties require regular upkeep. This is especially true in the coastal areas. Neglect leads to deterioration. That will reduce property value and can create liability issues.
For many heirs, the realization hits quickly: owning an inherited house you don’t live in is complicated and expensive. Understanding California’s specific rules around inherited property helps you make informed decisions.
How Does California Property Tax Work on an Inherited Home?
California’s property tax system for inherited homes changed significantly in recent years. It’s crucial to understand the current rules and their financial implications.
Proposition 19 Changed Everything (February 2021)
Before February 16, 2021, California allowed property tax reassessment exclusions when children or grandchildren inherited property from parents or grandparents. This meant heirs could keep the lower property tax basis their parents enjoyed, even if the property’s market value had increased dramatically.
Proposition 19 eliminated most of these benefits. Now, when you inherit property in California, it’s reassessed at current market value in most cases. This frequently results in substantially higher property taxes.
The New Rules for Inherited Property Tax
What’s a Market Value Reassessment?
First, there’s a reassessment at Market Value. When you inherit a California property, the county assessor reassesses it at current fair market value as of the date of transfer. If your parents bought their Los Angeles home in 1980 for $100,000 and it’s now worth $1.2 million, your property tax basis jumps to $1.2 million. Ouch.
What’s the The $1 Million Exception?
There’s one significant exception to the new rules. This is sometimes called The $1 Million Exception. If you inherit a primary residence (a home your parent or grandparent actually lived in as their principal residence) and you also make it your primary residence within one year, you can exclude up to $1 million of assessed value from reassessment.
If you inherit your parent’s primary residence valued at $1.2 million, and you move in and establish it as your primary residence, only $200,000 ($1.2M – $1M) would be added to the original assessed value for property tax purposes. It’s a good way to slim things down.
However, for absentee heirs, this exception rarely applies. You likely can’t take advantage of this exclusion if you live out of state or already own a primary residence elsewhere. The property will be reassessed at full market value, significantly increasing your annual property tax obligation.
Calculating Your New Property Tax Burden
California property taxes are calculated at approximately 1% of assessed value, plus local assessments and bonds. For absentee heirs who don’t plan to move into the property, this substantial increase often makes selling more financially sensible than keeping the home.
Property Tax Timeline After Inheritance
Property tax reassessment doesn’t happen immediately. The county assessor has specific timelines:
- The property is reassessed as of the date of death or date of transfer
- You’ll receive a supplemental tax bill for the difference between the old and new assessed values
- This supplemental bill covers the period from the reassessment date through the end of the fiscal year (June 30)
- Going forward, you’ll pay property taxes based on the new assessed value
Understanding these tax implications is crucial. They help you decide whether to sell your inherited California house or keep it.