Can You Inherit Your Parents’ Home and Keep Their Property Tax Basis Even If You Have to Buy Out Your Siblings?

The Little-Known Proposition 19 Strategy California Families Need to Know

When parents pass away and leave a California home to multiple children, one of the biggest questions is often:

"What happens to our parents' property-tax basis?"

For families who have owned their home for decades, this can be an enormous issue.

A home purchased many years ago may have a relatively low factored base-year value compared with today's market value. If the property is worth $1.5 million today but has a much lower taxable value, preserving that property-tax treatment can potentially save a family thousands of dollars every year.

Then there is the family question:

What if one sibling wants to keep the house, but the other siblings want their share of the money?

Many people have been told that if one sibling buys out the others, the portion purchased from the siblings will automatically be reassessed.

And if the sibling personally purchases those interests, that can indeed create a problem.

But there is an important distinction that many families — and even some professionals — don't know about.

There is a trust-based strategy that can allow the property to be distributed entirely to one child while potentially preserving the parent-child property-tax exclusion.

The strategy is based on how the trust distributes the property and equalizes the beneficiaries, rather than having one sibling personally purchase the other siblings' interests.

And this distinction is extremely important.

First, Let's Talk About Proposition 19

California Proposition 19 changed the rules governing transfers of real property between parents and children beginning February 16, 2021.

Under the current rules, a qualifying transfer of a parent's principal residence to a child can receive an exclusion from reassessment, provided the statutory requirements are met.

One of those requirements is that the property continues to qualify as the family home of the eligible transferee.

There is also a value limitation.

For transfers occurring from February 16, 2025 through February 15, 2027, the additional amount used in calculating the Proposition 19 value limit is $1,044,586.

And Proposition 19 applies to homes that are transferred through a trust as well.

The California Board of Equalization explains that when property is held in a revocable trust, a change in ownership generally occurs when the trust becomes irrevocable, typically upon the death of the trustor.

So what happens when there are three children?

The Three-Sibling Example

Let's say Mom and Dad own a home in Los Angeles County.

They purchased it decades ago.

Today:

• The home is worth $1,500,000

• The parents' factored base-year value is substantially lower

• The home is held in their trust

• They have three children

• One child wants to keep the house

• The other two children want their share of the estate in cash

The obvious solution might seem to be:

"I'll buy my brother and sister out."

But there is a very important difference between personally buying your siblings' interests and having the trust equalize the beneficiaries' distributions.

The Problem With Personally Buying Your Siblings Out

If you personally take your own money and pay your siblings for their interests in the property, you're potentially creating a sibling-to-sibling transfer.

The California BOE specifically says that the parent-child exclusion does not apply to transfers between siblings. Its current guidance gives the example that when one sibling buys out the other sibling or siblings, the portion transferred between siblings is subject to reassessment.

So simply writing checks to your siblings and then taking title to their portions isn't the strategy I'm talking about.

There is another way a trust may be able to accomplish the same economic result.

The Trust Equalization Strategy

This is where things get interesting.

The California Board of Equalization has specifically addressed situations where a trust has one major asset — the family home — and one beneficiary is going to receive the property while the other beneficiaries receive cash or other assets to equalize their shares.

The BOE's Assessors' Handbook explains that if the trustee has the authority to make a non-pro rata distribution, the trustee can allocate the property to one beneficiary and equalize the other beneficiaries' interests.

And here's the important part:

The trustee may be able to encumber the property with a loan before distributing it to the beneficiary.

The loan proceeds can then be distributed to the other beneficiaries to equalize their shares.

The BOE specifically states that when the requirements are satisfied, the transfer can be treated as a transfer from the trustor to the beneficiary and can qualify for the parent-child exclusion.

That is very different from the child personally borrowing money to buy the siblings' interests.

Here's How the Strategy Can Work

Let's use our three-sibling example.

The parents' trust owns a $1.5 million home.

There are three children.

Each child is entitled to approximately one-third of the estate.

The trust wants Child #1 to receive the house.

But Children #2 and #3 need to receive their economic shares.

Instead of Child #1 personally buying their siblings' interests, the trust may be able to borrow against the property.

For example, the trust could obtain financing secured by the property.

The trust receives the loan proceeds.

Those proceeds can then be used to equalize the distributions to the other beneficiaries.

The property can then be distributed to Child #1, subject to the loan.

The economic result can look similar to a buyout:

Child #1 gets the house.

Children #2 and #3 receive cash.

But the legal and property-tax structure is different.

The trustee is administering the trust and equalizing the beneficiaries rather than Child #1 personally purchasing the siblings' interests.

The BOE's published guidance specifically recognizes this type of trust equalization arrangement.

And Here's the Part Most People Don't Know

If the trust needs to borrow money to equalize the beneficiaries, you may not be able to simply go out and get a traditional conventional mortgage in your own name.

That's because the transaction is structured around the trust and the trust's distribution of the property.

The financing may need to be obtained by the trust, using the property as collateral, with the proceeds being used to equalize the beneficiaries before the property is distributed.

This is a very specialized situation.

And not every lender offers this type of financing.

That's one of the reasons families can have such a difficult time figuring this out.

A conventional mortgage lender may look at the situation as a standard purchase.

But this isn't necessarily a standard purchase.

It's a trust administration and property-tax planning issue that also requires specialized financing.

What If There Is Already Enough Cash in the Trust?

This can make the situation considerably simpler.

Suppose the trust has other assets — cash, investments, or other property — that can be used to equalize the siblings.

In that case, the trustee may be able to distribute the home to one beneficiary and distribute other trust assets to the other beneficiaries, assuming the trust documents and applicable law permit the structure.

The BOE's guidance specifically discusses non-pro rata distributions and the equalization of beneficiaries.

So the family may not need to borrow at all.

The key question becomes:

Does the trust have enough other assets to equalize everyone's share?

If it does, financing may not be necessary.

If it doesn't, a specialized trust loan may be something the family needs to investigate.

I Personally Went to the Los Angeles County Assessor

This subject became particularly important to me because I kept hearing conflicting information.

I was told by multiple sources that if siblings inherited a property and one sibling wanted to keep the home, there was no way to structure the transaction so that the entire property could retain the applicable parent-child property-tax treatment.

I didn't want to repeat something I wasn't certain about.

So I went directly to the Los Angeles County Assessor's Office to discuss the situation.

The answer I received was that the trust equalization structure described above is a legitimate way to accomplish the distribution when the facts and trust documents meet the applicable requirements.

That distinction matters.

I'm not suggesting that every family can automatically use this strategy.

I'm saying that there is a legitimate, established trust-distribution structure that is very different from simply having one sibling personally purchase the others' interests.

And the California BOE's own published materials support the concept of a trustee encumbering the property and using the loan proceeds to equalize the beneficiaries.

But There Are Important Rules

This isn't something you should try to put together after the fact.

The details matter.

For example, the BOE's guidance indicates that:

• The trust must have the appropriate authority to make the distribution.

• The trustee must be the party encumbering the property.

• The loan proceeds are used to equalize the beneficiaries.

• The beneficiary receiving the property cannot simply use personal funds to purchase the other beneficiaries' interests and expect the same treatment.

• The property must otherwise qualify for the parent-child exclusion.

• Proposition 19's principal-residence and value-limit requirements still apply.

The trust document itself can also be extremely important.

The BOE has distinguished between a trustee having authority to make a non-pro-rata distribution and situations where the trust specifically gives a beneficiary the right to purchase the property from the other beneficiaries. Those structures can have different property-tax consequences.

What About the Loan?

This is one of the biggest practical challenges.

If there isn't enough cash in the trust to equalize the siblings, the family may need financing.

But this isn't necessarily a conventional "buy a house" mortgage.

The loan may need to be structured so that:

The trust is the borrower.

The trust owns the property.

The property secures the loan.

The loan proceeds are distributed by the trustee to equalize the beneficiaries.

The property is then distributed to the child who will retain it, subject to the financing.

Because this is a specialized transaction, not every lender knows how to do it, and not every lender offers this type of loan.

That is often the missing piece when families are trying to figure out how to make the numbers work.

This Is Why Timing Matters

If your parents have passed away and the family is considering keeping the home, don't immediately start transferring interests between siblings.

Before anyone signs a deed, pays another sibling, or takes out financing, the family should understand the property-tax consequences.

Ideally, the trustee, estate attorney, tax professional, title company, lender, and real estate professional should understand the structure being considered.

Once the property has already been transferred in a way that creates a reassessment, you may not be able to simply undo it.

A Note About Proposition 19's Value Limit

Even if the trust equalization strategy is available, that does not mean every inherited property automatically retains its parents' exact taxable value.

Proposition 19 has a value limitation.

The exclusion generally applies to the parent's principal residence when the statutory requirements are met, and the property's value is compared with the applicable factored base-year value plus the Proposition 19 adjustment amount. Any amount above the applicable limit can be added to the transferred taxable value.

So every situation needs to be calculated individually.

What Families Should Ask Before Selling an Inherited Home

If you're dealing with an inherited California property, I recommend asking these questions before making any decisions:

1. Is the property eligible for the Proposition 19 parent-child exclusion?

2. Was the property the parents' principal residence?

3. Will the child receiving the property make it their principal residence?

4. What is the parents' current factored base-year value?

5. What is the property's current market value?

6. Does the Proposition 19 value limitation affect the exclusion?

7. How many beneficiaries are involved?

8. Does the trust allow a non-pro-rata distribution?

9. Are there enough other assets in the trust to equalize the beneficiaries?

10. If not, can the trust obtain specialized financing?

11. Is the proposed transaction actually a trust distribution or is one sibling personally purchasing the others' interests?

That last question may be one of the most important.

The Bottom Line

If multiple siblings inherit a California family home, "one sibling buys out the others" is an oversimplification.

There is a significant difference between:

A sibling personally buying the other siblings' interests

and

A trustee using the trust's authority to distribute the property to one beneficiary while equalizing the other beneficiaries — potentially using a loan secured by the trust-owned property.

The California Board of Equalization has specifically addressed this type of trust equalization structure.

And when a family home has a substantial difference between its current market value and its existing property-tax value, understanding this distinction can be extremely important.

The financing piece can also be challenging because specialized trust financing may be required, and not every lender offers these loans.

If you're dealing with an inherited home and multiple siblings, this is something worth investigating before anyone transfers an interest in the property.

Have a Parent's Home Been Left to Multiple Siblings?

If you're dealing with a trust, inherited property, sibling buyout, or Proposition 19 question, I'd be happy to help you understand the real estate side of the situation and connect you with the appropriate professionals for the legal, tax, and financing questions.

I also have information on lenders who understand the specialized financing that may be needed in a trust equalization situation.

Contact me before you transfer the property or pay your siblings. The order and structure of the transaction can matter.

Important: This article is for general educational purposes only and is not legal, tax, or lending advice. Proposition 19 is complex, and eligibility depends on the specific facts, trust documents, property ownership, timing, residency, value, and applicable law. The California Board of Equalization states that its materials are general information and should not be relied upon as a legal interpretation. Consult a qualified California estate-planning attorney and tax professional regarding your specific situation. Financing is subject to lender requirements and approval.