Inherited Property and the Parent-Child Exclusion
- Daniel An
- Aug 6
- 5 min read
Inheriting property in Los Angeles County can be both a financial blessing and a bureaucratic maze. Between federal tax rules like the step-up in basis and California-specific laws like Proposition 13 and Proposition 19, heirs must navigate a complex landscape to avoid costly surprises. This article breaks down the key concepts of cost basis, inheritance, and property tax reassessment—with a focus on how they apply in Los Angeles County.
💰 What Is Cost Basis?
Cost basis is the original value of a property for tax purposes. It determines how much capital gains tax you’ll owe when you sell the property.
Original basis: Typically the purchase price plus improvements.
Adjusted basis: Includes renovations, closing costs, and depreciation (if applicable).
Capital gain: Sale price minus cost basis.
🔄 Step-Up in Basis for Inherited Property
When you inherit property, the IRS allows a step-up in basis to the fair market value at the date of death. This means:
You pay capital gains tax only on the increase in value after inheritance.
If you sell the property soon after inheriting, your taxable gain may be minimal.
Example:Your parent bought a home in 1990 for $200,000. At the time of death in 2024, the home is worth $1.2 million.Your new cost basis is $1.2 million. If you sell it for $1.25 million, your taxable gain is just $50,000.
🏠 Reassessment in Los Angeles County
California’s Proposition 13 limits property tax increases by capping assessed value growth at 2% annually. However, when ownership changes—such as through inheritance—the property is typically reassessed to current market value, which can dramatically increase the annual tax bill.
📜 Proposition 19: Major Changes to Inheritance Rules
Passed in 2020, Proposition 19 significantly narrowed the ability to avoid reassessment on inherited property.
Key Rules for Los Angeles County:
The inherited property must have been the primary residence of the deceased.
The heir must move in and make it their primary residence within one year.
The heir must file for the Homeowners’ Exemption (preferably within one year).
Only the first $1 million of market value above the original tax base is excluded from reassessment.
🧮 Example from LA County Assessor:
Original tax base: $300,000.
Market value at inheritance: $1.5 million.
Excluded amount: $1.3 million.
Excess value: $200,000.
New assessed value: $500,000 (base + excess).
If the heir does not move in, the property is reassessed to full market value, potentially increasing annual taxes by thousands of dollars.
🧠 Strategic Considerations for Heirs
✅ Benefits of Moving In:
Avoid reassessment
Retain low property tax base
Reduce long-term costs
❌ Risks of Keeping as Rental or Second Home:
Full reassessment
Higher annual property taxes
Reduced profitability
📝 Planning Tips:
File the Homeowners’ Exemption within one year
Consult a tax advisor about capital gains implications
Consider estate planning strategies to preserve tax benefits
📍 Local Impact in Los Angeles County
According to the Legislative Analyst’s Office, most inherited homes in LA County were owned for decades, meaning their tax bases are far below current market values. Proposition 19 has led to:
Increased reassessments for non-owner-occupied inherited homes.
Higher property tax bills for heirs who don’t move in.
Greater awareness of estate planning needs among families.
🏠 THE PARENT-CHILD EXCLUSION IN CALIFORNIA: What Heirs Need to Know Post-Proposition 19
In California, the parent-child exclusion has long been a valuable tool for families seeking to preserve low property tax assessments when transferring real estate between generations. However, the passage of Proposition 19 in 2020 significantly changed the rules, narrowing the scope of this exclusion and introducing new requirements that affect thousands of families across the state—including those in Los Angeles County.
📜 What Is the Parent-Child Exclusion?
The parent-child exclusion allows parents to transfer real property to their children without triggering a property tax reassessment, which would otherwise increase the annual tax bill based on current market value. In relation to inherited property, the parent-child exclusion does not affect the step up in cost-basis discussed above but addresses property tax reassessment for transfers of real property from parent to child, even when the parent is still alive.
Under Proposition 13, California property taxes are based on the property's assessed value at the time of purchase, with annual increases capped at 2%. When ownership changes, the property is typically reassessed—unless an exclusion applies.
Before Proposition 19, the exclusion applied broadly:
Primary residences could be transferred without reassessment, regardless of value.
Up to $1 million of assessed value in other properties (e.g., rental homes, commercial buildings) could also be transferred without reassessment.
🔄 How Proposition 19 Changed the Rules
Effective February 16, 2021, Proposition 19 introduced new limits to the parent-child exclusion:
✅ What Still Qualifies:
Transfers of a primary residence from parent to child.
The child must make the home their primary residence.
The child must file for the Homeowners’ Exemption within one year of the transfer.
🚫 What No Longer Qualifies:
Transfers of vacation homes, rental properties, or commercial real estate.
Transfers where the child does not live in the home.
Transfers exceeding the $1 million exclusion cap on market value above the original tax base.
🧮 Example:
Original assessed value: $400,000
Market value at transfer: $1.6 million.
Exclusion cap: $1 million.
Excess value: $200,000.
New assessed value: $600,000 (base + excess).
If the child does not move in, the property is reassessed to full market value—$1.6 million in this case—resulting in a much higher annual tax bill.
🏡 Implications for Families in Los Angeles County
Los Angeles County has some of the highest property values in the state, making the parent-child exclusion especially important for families trying to preserve generational wealth.
Key Considerations:
Many homes have low assessed values due to long-term ownership.
Reassessment can increase property taxes by thousands of dollars per year.
Families must act quickly to file the necessary exemption forms.
Estate planning is more critical than ever to avoid unintended tax burdens.
📋 How to Qualify for the Exclusion
To successfully claim the parent-child exclusion under Proposition 19:
Transfer must occur on or after February 16, 2021.
Child must move into the home and make it their primary residence.
Homeowners’ Exemption must be filed within one year.
Property must be a family home or family farm.
If multiple children inherit the home, all must live in it to qualify—otherwise, reassessment applies.
🧠 Final Thoughts
Inheriting property in Los Angeles County is no longer a straightforward tax break. While the federal step-up in basis still offers relief on capital gains, California’s Proposition 19 has tightened the rules around property tax reassessment. Understanding these laws—and acting quickly—can make a significant difference in your financial outcome.
The parent-child exclusion remains a powerful tool, but its benefits are now limited to families who plan carefully and meet strict criteria. In high-value areas like Los Angeles County, failing to qualify can result in dramatic increases in property taxes.
If you're considering transferring property to your children—or expect to inherit property soon—it’s wise to consult with a tax advisor or estate planner. Understanding the nuances of Proposition 19 and the parent-child exclusion can help you preserve your family's financial legacy.
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