Why the math on inheriting your parents' California home has changed
sfchronicle.com
sfchronicle.com
“If three siblings inherit a $1.5 million house from their parents, and only one of them wants to keep it, she will have to buy out the other siblings’ share for $1 million, which reflects the high cost of housing in the Bay Area,” Alisjahbana said. “It’s often not possible to buy out the siblings’ shares, so in this situation it’s common to sell the house.”
My heart really goes out to the unfortunate people who inherit $500,000. Compared to those of us who inherit $0, their situation is so tragic.
The person is often inheriting their childhood home. But they should have to sell the family home to a transplant techie, pay tens, or hundreds of thousands of dollars in taxes to a rent-seeking government, leave and move to Bakersfield to something?
If you want housing to be affordable, build housing until it is instead of trying to prop up pseudo feudualistic practices around hereditary land ownership to paper over the gross distinction of the housing market.
That a person doesn't have a right to live where they'd like? This gets trotted out every time some might've been Californian complains about high housing costs.
Or is it that inheritance should be taxed? Debatable I suppose but hardly 'wild'.
The only problem I can see with the scenario is that the value on a 'fixer-upper 1950s ranch' is so high that the tax on it is beyond what an 'average working class' fellow or fellowette can reasonably expect to afford.
And even that is pretty hard to find. Even if you assume a worst-case scenario, where a small tract house is now worth $3mil, the standard California property tax on that would be $37,500/yr, or 3,125/mo. That's well below market rent for such a property in any area where a home like that would sell for $3mil. Either live in it, and be happy that you get a below-market Single-Family Home, or rent it out, and easily cover the property taxes and maintenance from the rental income, creating a robust passive income stream. Or sell it! In all these situations, the inheritor is better off, even well off. :D
They stand to inherit it because their parents worked hard their entire lives and invested an obscene amount in a desirable market. They probably made significant sacrifices to do this. Many of our families were here long before real estate started getting out of hand and contributed to building the economic machine that makes California so desirable today.
Newcomers absolutely deserve to pay higher rent and mortgage rates to live in the same place. They always had the freedom to invest in their own state or country.
Native Californians were victims of genocide and are a completely different and special case than people who bought houses in California in the 70s and 80s.
Kids inheriting property need to pay property taxes, just like their new neighbors. Move on please, nothing to see here.
I remember a friend bought a house, and the deed said <blah-blah> family trust.
This is a misleading and extremely outlying example. No one in CA, even if they bought their house for $80,000 and never made a single capital improvement, still has only $800 property tax bill, because it goes up each year (just not as much as the market value). And to get an increase of $20K in property tax, the house would have to be worth $3,000,000, which is still far above the median.
More importantly, the income tax benefit is orders of magnitude a bigger deal. Income tax on a $2,000,000 gain would be 23.8% federal at least, and probably well over 10% California (so about $650,000). Yet they will pay none of that, due to the basis adjustment to fair market value upon death of the owner(s).
If the heirs can't figure out how to keep the house via a secured loan and their $650,000 in income tax savings, they probably have much more pressing money problems to deal with I imagine.
I live in California but not in the Bay Area in a house Zillow estimates at $1.2M. I have a neighbor in an admittedly smaller house that Zillow estimates at $740k. In 2022, they paid $482 dollars in property taxes on an assessed value of $34.5k. Whenever they sell, the new owner will pay 20x in taxes. Sites like Zillow show all of this and I can find multiple examples within a couple blocks of my house.
Despite your anecdata, I still wager that very few people as percent of overall homeowners have owned and lived in the same house for fifty years without making major improvements.
Because I can't query Zillow's data, I don't know any better way to do it than find a neighborhood where most of the houses are old and just see what their property taxes are one by one. In my neighborhood which was built in the 1910s and 1920s, there's quite a few examples of people paying sub $1k in property taxes per year. It isn't a majority or anywhere close to it but within a couple blocks of my house I found nearly 10 examples. I even found a 4-unit multifamily paying just under $1k total.
If you want a pure anecdote, a friend in a nearby house just had the knob and tube in their house replaced with modern electrical (~$35k). The electrician found gas lines in the 1st floor ceiling for indoor gas lighting. Although the lighting fixtures were gone, the gas lines were still hooked up to the main house gas line.