California Real Estate Law
Q.When a parent dies and property passes to a child, I believe that in Los Angeles the property is reassessed as of the date of death to establish current market value. When sold by the child, any money in excess of cmv is taxed at capital gains rate of 28%. My question: If the child already has his name of the deed (as a gift from the parent) and the parent retains a life estate on said property, is the life estate then the legal equivalent of a lien? If at some later date, prior to the parent's demise, he or she relinquishes the life estate, is this event equivalent in any way (regarding reassessment of cmv) to what occurs at death of an owner? For example, a child was put on the property's deed in 1962. The parent retained a life estate. In 1989 the parent relinquished the life estate but did not die for another five years. Would this property's cmv be established in 1962 and be invoked at any later sale? Or would the cmv be related in any way to the date of relinquishment of the life estate? If yes to the latter, the interested party will save about $85K in capital gains taxes.
A.Your question is solely one of federal tax law, not California real estate law. When a decedent dies, federal law requires that his property be included in his estate at fair market value, and his devisees or heirs take the property at a "stepped-up" basis equal to that value. However, the recipient during the lifetime of the decedent of a remainder interest in property obtains a basis in that property at the time of the gift based on valuation actuarial tables promulgated by the IRS (the value of the gift depends on the donor's age, life expectancy, applicable interest rates and the nature of the estate granted). The donee/remainderman does *not* receive a step-up at the time of the death of the holder of the life estate, since he receives no interest at the time of death other than the interest that he acquired, in this case, years earlier. If you are interested in researching this point, check out Treas. Reg. § 255.2512. In general when property in California is transferred, the value for property tax purposes is increased to current market value. This generally results in an increase in property taxes. Property taxes are otherwise not increased, except minimally, if the value of the property is increased due to inflation.
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