Moneybox

More Evidence That California Is Deteriorating Into a Feudal Society of Inherited Land Wealth

A mansion in California.
Thanks Mom.
Doug Letterman/Flickr

Look no further than a Los Angeles Times investigation published on Friday afternoon.

The story, by Liam Dillon and Ben Poston, analyzes the fallout from a 1986 California law that allows children to inherit their parents’ frozen-in-time tax assessments along with their houses. The state’s property tax rolls were forever stunted by 1978’s beloved, infamous Proposition 13; the 1986 follow-up, Proposition 58, is what allows those ’70s tax rates to be enjoyed by the next generation.

According to the California Legislative Analyst’s Office, the inheritance exemption cuts $1.5 billion from the state’s property tax intake each year—or 2.5 percent of total statewide property tax revenue. In counties with the highest property values, the exemption can reduce state revenue by nearly 10 percent.

The law allows the children of California homeowners to enjoy the fruits of Prop 13, which fixed the statewide property tax rate at 1 percent and applied the millage to purchase price rather than value. In other words, your inherited property taxes might be determined by the price your parents paid for their house in 1980, which in virtually all of California is a tiny fraction of what it’s worth now.

A previous report from the LAO emphasized how uneven tax-collection rates are in just one neighborhood of Los Angeles:

A map showing that tax rates in one Los Angeles neighborhood vary widely even among houses with similar market values, based on date of purchase.
Tax rates vary widely even among houses with similar market values, based on date of purchase.
California Legislative Analyst’s Office

Prop 58 was intended to help families avoid a sudden property tax spike after a homeowner’s death and allow children to afford to stay in their parents’ homes. But it has also enthroned a privileged class of second-generation California homeowners, many of whom don’t even live in those houses.

As the Times reports, “as many as 63% of homes inherited under the system were used as second residences or rental properties last year” in L.A. County, home to more than 1 in 4 Californians. The piece profiles a handful of landlord-heirs whose rent rolls could pay off their annual property taxes in a matter of weeks. The discount in some cases is more than 90 percent off what a new buyer would pay.

All in all, the state preserves old assessments on 60,000 to 80,000 inherited properties each year. It’s an intergenerational transfer of wealth that upholds a system in which out-of-state, immigrant, or first-generation homebuyers wind up shouldering a disproportionate tax burden.