Prop 58 Loans – Loans for Proposition 58 in California

Prop 58 Loans – How do they work?

Prop 58 loans from specialized trust loan or probate and estate lenders are made directly to the estate or irrevocable trust. The estate or trust currently owns the property so the estate or trust will be the borrower for the loan. A note and deed of trust are recorded against the real estate just like a traditional mortgage from a bank. This provides the security for the loan.

When the Prop 58 loan is funded, loan proceeds are sent directly to the bank account of the irrevocable trust or estate. The cash can then be paid to the beneficiaries who are selling their interest in the real estate. Once the other beneficiaries are paid off, the title of the property can be transferred from the name of the trust or estate into the name of the beneficiary keeping the property.

Now that the title of the property is in the name of the new owner, they can go to a conventional lender such as a bank and refinance the short-term Prop 58 loan into a long-term loan. The Prop 58 loan can also be paid off with cash at this point.

What is Prop 58? How Does Prop 58 work?

Proposition 58 is a California constitutional amendment which excludes a property tax reassessment when real estate is transferred from parent to child. A property that has been owned for many years often has relatively low annual property taxes due to Proposition 13. Prop 13 limits property taxes based on the market value of when the property was initially purchased and limits annual increases to 2%

Typically, when real estate in California is sold or transferred, the property is reassessed at the current market value. This can result in a drastic increase in annual property taxes. Prop 58 allows for the real estate property taxes to not be reassessed when the property is transferred from parent to child and the Prop 58 application is filed correctly.

The new property owner (child or grandchild) is able to maintain the parent’s property tax rate which are calculated on Proposition 13 based on when the property was originally purchased.

Prop 58 – Prevent California Property Tax Reassessment for Inheritance Property

Prop 58 can prevent a California property tax reassessment on inheritance properties. California’s Prop 58 applies only to a parent to child transfer. The Proposition 58 reassessment exclusion is granted by the county where the property is located. The Prop 58 transfer form must be filed with the county after the inherited property is transferred.

Why are Prop 58 Loans necessary?

1. Provide liquidity to divide an interest in inherited property

When beneficiaries of an estate or trust are dividing interest in real estate, they will often need to borrow against the real estate so one sibling can buy out the other(s). At this point the title of the property is still in the name of the trust or estate. Because the beneficiary is not currently on title, a bank will not be able to provide financing. A Prop 58 compliant loan will give the siblings the needed liquidity to divide the interest.

2. Avoid a sibling to sibling transfer

Even if the beneficiary who is going to keep the property has enough cash on hand to buy out the other siblings, they should not use the personal funds to divide the interest in the inherited real estate. Cash going from one sibling to another sibling will make the transfer appear as a sibling to sibling transfer which is not eligible for Prop 58. Only parent to child transfers are protected (grandparent to child for Prop 193).

Maintaining Prop 13 on Inherited Property

Maintaining Prop 13 on an inherited property with a Prop 58 loan is a valuable opportunity that can potentially save the beneficiary thousands of dollars in property taxes every year.

Proposition 13 helps California property owners by limiting property tax to 1% of the initial market value with annual increases capped at 2%. Real estate that has been owned for many years will often have a significantly lower property tax basis compared to similar property that was recently purchased. A reassessment of property taxes can result in the annual tax bill increasing by 10x or more.

Selling or transferring a property are usually Prop 13 reassessment triggers but Prop 58 will prevent the higher property taxes. A refinance on the inherited property will not trigger a property tax reassessment.