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Real estate transactions through inheritance may offer tax cut

A California law may figure prominently in one's estate plan, depending on the person's circumstances and needs. The statute, passed in 1986, allows children to inherit real estate from their parents without having to pay a tax based on the current market value. The effect is to protect the children from the impact of steep tax increases on inherited property. The tax-friendly law appears to be cutting down on the number of real estate transactions and on the number of marketable homes going on the market.

The importance and noticeability of the law may be more pronounced today than in prior years. That is likely because baby boomers are reaching into their early 70s in age, and leaving their properties to their heirs. The heirs who inherit homes under these circumstances sometimes convert the properties to other uses, including rental units.

A state analyst concluded that without the tax-break law there would me more housing turnover and more available homes to buy. The law specifically earmarks a person's primary residence for favorable tax treatment. This equates to about 60,000 to 80,000 California properties passing between parents and children each year at the lower, original market value. That policy can result in a savings of tens of thousands to some homeowners.

Without having to reassess the properties to current market value, the tax benefit on real estate transactions caused a $1.5 billion drop in revenues statewide in 2015-16. Due to that and other considerations, the California Association of Realtors is preparing an initiative for the Nov. 2020 ballot that would scale back on the law's benefits. The existing law has numerous provisions, including that the parent does not have to be deceased, other relatives are included for receiving the benefit and it continues for an unlimited number of generations.

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