Inherited house-sell or rent / prop 19 impacts

[Hobie]

Family friend inherited a $1M home in Yorba Linda (the OC)prior to the Feb 15 2021 Prop 19 rules triggering a re-assessment in prop tax. He is one of three siblings (successor trustees) and feels splitting rent income 3 ways will not be as profitable as selling home and investing in stocks.

I say don’t sell as to not lose the Prop 13 benefit, increasing equity (+9%YOY), and maybe one of the children may want to buy and live in it. His brother and sister are over 55 and all expect to work to 65 before retiring. Area rents are ~$3500/mo.

What would piggs do?

[scaredyclassic]

How will repairs be financed?

[sdrealtor]

I’d likely sell. With three heirs and three different set of circumstances let each decide. Now if it was a prime beach area property I’d feel differently. Yorba Linda is nice but not something that is irreplaceable IMHO

[Coronita]

Tough to say, it really depends on the situation…

It sounds like your friend wants out. If that’s the case, the thing he can probably consider is selling his interest to the other two siblings.If the other two siblings want it they can pay him based on some agreed upon appraised value… If they other two don’t have liquid cash, they can do a refinance to get cash out and deal with the mortgage.

Factors personally I would consider is

1. How well to the siblings get along, when it comes to money things? Red flag is their money habits and outlook are different

2. Are the siblings the decision makers in financial things in their respective household? Siblings might otherwise get along, but sometimes when a spouse is also involved, things get sticky…

3. Is there one particular sibling that wants to live there?

4. Is there one particular sibling that is interested in managing the rental? Or all 3 not really rental “savy”?

I wouldn’t count on Prop 13 being around indefinitely for rental properties imho.

Not sure what me and my sibling will do when our parents pass. We keep telling my parents to spend every dollar they worked hard for since we want none of it. I think we both kinda share the same viewpoint that it’s not the final amount that really matters, it’s the journey we take to getting there. But you know some parents will save every penny and live very frugally. If they don’t manage to spend everything before they pass, i think for convenience we probably will split things between what’s in NorCal versus SoCal, since it’s fairly even in terms of value. NorCal probably has a worth advantage, but don’t really care. I’m done saving for my kid’s major expenses including college and she has years to go for both of hers even though I’m younger… HA!

[Hobie]

Old man did set aside $30k cash tied to house as he was thinking the kids would make it a rental. ( suggests, maybe, the kids don’t have enough cashflow )

No rental savvy. Also, not huge interest in becoming landlords. Good point re sibling issues. Including emotional attachment to home they grew up in. So many Chiefs..

I was fixated on not loosing the tax base. But these people issues do outweigh the financial side.

I think the only 2 realistic options is for one the them to buy out the others or just sell it outright.

[Coronita]

[quote=Hobie]Old man did set aside $30k cash tied to house as he was thinking the kids would make it a rental. ( suggests, maybe, the kids don’t have enough cashflow )

No rental savvy. Also, not huge interest in becoming landlords. Good point re sibling issues. Including emotional attachment to home they grew up in. So many Chiefs..

I was fixated on not loosing the tax base. But these people issues do outweigh the financial side.

I think the only 2 realistic options is for one the them to buy out the others or just sell it outright.[/quote]

I’ve had so many stories about once the spouse is involved things get really dicey. So that definitely is a factor also. Anytime there’s a split asset, it’s tricky unless the siblings are the primary financial decision maker in the household. Other things to consider is when a house gets rented and split 3 ways, maintenance costs also should be split 3 ways. Are all 3 prepared for that, and are 3 spouses ok with that, especially if all 3 are not in the same economic standing wrto each other (one house is a 80k/year household versus another is a 300k/year household)…Because if unforeseen expenses come up, are all 3 households able to evenly split the cost of upkeep? It’s trickier than say splitting a IRA/401k/Roth up, because there’s no ongoing upkeep costs with maintaining those assets.
For instance, I love my sis, and we share very similar financial backgrounds (though she’s definitely a bigger spender than me). But my brother in law, which I totally like, is simply in a different planet when it comes to money. Granted he’s in sales and makes a shitload of more money than me, his burnrate is also much higher. Not sure how that would work out if we had to share an investment property. So when it comes to that, it’s probably better we split things in whole and sell what we can’t split or one side buys the other side out if the other side wants to keep.

I won’t even talk about the possibility of one sibling or spouse of a sibling backstabbing the other sibling’s household, which I’ve seen happen too.

[gzz]

I agree with SDR and Flu’s comments.

Easy to do a rough calculation on the value of Prop 13. Let’s say it is at 150k but is worth 1m. 850k x 1.1% = $9,350/year. At 4% discount rate that means the lost Prop 13 value of selling is $233,750.

That’s quite a large loss.

But from your post I kind of see a situation where the poorest of the siblings just moves in and never pays rent. Will the other two evict them? Fight it out in court?

Another source of conflict is one sibling will likely end up doing most or all of the landlord work without getting extra from the rent.

[sdrealtor]

Even if there aren’t problems there are differences. I was successor trustee for my mom about 18 months ago for a good sized investment portfolio. I’m the youngest of four. Oldest was ready to retire, has nice almost paid off home in CA and daughter in a solid career job. She wants zero risk. Other sister is in paid off home in rural AZ who still will work five more years. Two kids one still finding his way and one finishing PhD in civil engineering. She’s interested in investing and growing it for her eventual retirement and kids. Brother is a doctor who could retire anytime with huge pension but enjoys work and has young kids from second marriage. It’s just play money for him. I’m fine, have good savings and just want to continue building generational wealth for my kids and future generations. We all are very different with different wants and needs. Couldn’t imagine trying to deal with an investment property split four ways even though they would just say do what you think is best. Glad I just had to divvy it all up

[svelte]

Another thing to consider: if the house is sold within 6 months of the death, then the value of the house is part of the estate and therefore proceeds transfer tax exempt for estates up to $11M.

If the house is sold after 6 months, then when the house is sold, there could be tax on the difference between the value at the time of death and the sale value.

Or something like that, I forget exactly.

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