Thinking of Passing Your Second Home to Your Children? Think Twice.

 

In 2011, John and Mindy Zemenick purchased a multi-family investment property in the Santa Cruz mountains. At the time, their plan was simple… to grow their assets through the acquisition of real estate to eventually be passed onto their children as a part of their inheritance. Throughout their careers, the Zemenicks had made strategic investments in a few small businesses, the stock market, and insurance. But, wanting to diversify their wealth portfolio even further, they purchased a beautiful two-story duplex nestled in the middle of the mountains with a short drive to the coast.

 

With minimal upgrades, the duplex quickly went onto the short-term rental market where they began making an immediate return on their investment. With the California coast as a hotbed for tourism, the duplex was listed on Airbnb and other short-term marketing sites. The duplex remained occupied at 60-75% of the year, and the Zemenicks were excited about their decision to get into the real estate investment game.

 

Then, COVID-19 hit. And the Airbnb market came to a grinding halt.

 

Nine months later, California voted to enact changes to Proposition 19 affecting the way property taxes on second homes would be assessed as a tool for inheritance.

 

The passage of Proposition 19 has led to a radical change in California law.

 

Beginning February 16, children who inherit real property from their parents will have to factor in increased property taxes in the decision to keep or sell the property. If a child chooses to keep the real property and use it as the child’s primary residence, then up to $1 million of the reassessed value will be excluded from the new property-tax basis. Before, primary residences could be transferred with no cap.  If the child chooses to keep the property as a second home, vacation home or rental property (anything other than as the child’s primary residence), there is no $1 million exclusion, and the child will face a significant increase in property taxes.

 

Going back to the Zemenick story, should the Zemenicks decide to pass their duplex to their children, their children will have to pay property taxes based on the assessed fair market value, which will significantly affect their decision to keep or sell. As a result, many seniors who avoided selling their properties might reconsider, which could affect the inventory levels in the near future.

 

If you are facing similar debate or just want to learn more about the pros and cons of Proposition19 please feel free to contact us and we will be happy to connect you with the right resource.