Actors Jeff and Beau Bridges, along with their sister, own a four-bedroom Malibu home with access to a semi-private beach and panoramic views of the Pacific Ocean.
They inherited it from their mother, who had owned the house since the late 1950s when their father Lloyd Bridges first made it big in Hollywood.
Earlier this year, they advertised the “stunning Malibu dream” for rent at $15,995 a month — a hefty price tag for a house that has a property tax bill of less than half that.
Like other descendants of a generation of California homeowners, the Bridges enjoy a significant perk that keeps their property tax bill low. Part of that is thanks to Proposition 13, which has strictly limited property tax increases since 1978. But they also benefit from an additional tax break, enacted eight years later, that extended those advantages to inherited property — even inherited property that is used for rental income.
California is the only state to provide this tax break, which was designed to protect families from sharp tax increases on the death of a loved one. Without the tax break, proponents argued at the time it passed, adult children could have faced potentially huge bills, making it financially prohibitive to live in their family homes.
Most Homes Are Rentals
But a Los Angeles Times analysis shows that many of those who inherit property with the tax breaks don’t live in them. Rather, they use the homes as investments while still taking advantage of the generous tax benefits.
In Los Angeles County, as many as 63% of homes inherited under the system were used as second residences or rental properties last year, according to the Times’ analysis. A similar trend was found in a dozen other coastal counties where prime vacation spots in Sonoma and Santa Cruz have some of the highest concentration of homeowners receiving the benefit.
The inheritance tax break, The Times has found, has allowed hundreds of thousands—including celebrities, politicians, out-of-state professionals and some of California’s most prominent families—to avoid paying the higher taxes owed by newer homeowners. The tax break has deprived school districts, cities and counties of billions of dollars in revenue.
The Bridges, who declined to comment for this article, would have paid an additional $300,000 in property taxes if the house had been reassessed when they inherited it in 2009, according to a Times calculation. In Los Angeles County, the tax benefit cost schools, cities and county government more than $280 million in property tax revenue last year, the analysis shows.
One effect of Proposition 13 and the inheritance tax break has been to create generational inequities between those who have owned homes and those who haven’t. The laws place no limits on how many descendants can take advantage of the benefit, so future generations of Californians whose ancestors purchased houses decades ago will continue to pay property taxes based on values established in the 1970s.
The laws have helped many families stay in their homes without onerous tax burdens. But soaring property values across California also have created windfalls for longtime homeowner families that even the biggest backers of these laws didn’t expect.
Jon Coupal, the head of the Howard Jarvis Taxpayers’ Assn., the anti-tax organization founded by the driving force behind Proposition 13, said he believed the inheritance benefit continues to protect children from losing their family homes to tax hikes. But even he was surprised the provision had led to so many heirs using the property as rentals.
“That was probably not in the voters’ minds,” Coupal said.
To understand the tax break’s effects, The Times obtained a decade’s worth of property records from 13 counties along California’s coast, where the state’s housing problems are the most acute and real estate prices are generally the highest. Those records were compared with public assessor data provided by real estate website Zillow.
Financial Impact on Local Coffers
Up and down the coast, inherited houses are clustered in neighborhoods with higher property values, from the Bay Area’s wealthy Hillsborough area to coastal Santa Barbara. Local governments are missing out on the larger tax payments that would come from these expensive homes. Areas of Beverly Hills and Manhattan Beach could have collected an additional $7 million and $5.5 million, respectively, in property tax receipts last year without the inheritance benefit, The Times found.
Vacation enclaves serve as the most popular locations for heirs using their parents’ homes as investments.
In Malibu, Hollywood Hills and Playa del Rey, more than 80% of owners report their inherited property is not their primary residence, according to The Times analysis. Families who have owned property the longest are also more likely to rent the houses out or use them as second residences, the records show. In L.A. County, three-quarters of heirs whose parents owned homes at the time of Proposition 13’s 1978 passage don’t report the property as their primary home, The Times found.
The Tax Savings
The tax privileges afforded current homeowner families stand in contrast to the higher taxes many newcomers face. The Bridges children had a $5,700 tax bill last year for their Malibu home now estimated by Zillow to be worth $6.8 million. If someone bought the home at that price today, they’d pay more than $76,000 annually in property taxes.
The higher taxes on properties changing hands has had a major impact, especially on middle- and lower-income Californians trying to enter the market.
California’s home prices have neared record highs, with median values of $539,800 and monthly two-bedroom rents averaging $2,400. The state has the nation’s highest poverty rate when housing costs are included, and 1.7 million families spend more than half their income on rent.
“The story of California in 2018 is skyrocketing inequality,” said Assemblyman David Chiu, a San Francisco Democrat who leads the Assembly’s housing committee. The inheritance tax break, he continued, “has exacerbated that inequality and is symbolic of that inequality. The idea of the American Dream of everyday people being able to make it is completely impacted when the haves get more, and the have-nots have no chance of benefiting from property investment windfalls.”
Prop 13 Benefit
Proposition 13, passed in 1978, limits property taxes to 1% of a home’s taxable value, which is based on the year the house was purchased. It also restricts how much that taxable value can go up every year even if a home’s market value actually increases much more. After a house is sold, property tax bills are recalculated for the new owner based on the new purchase price. So the longer someone owns their home, the lower their property taxes are as a percentage of the home’s actual market value.
The inheritance tax break, known as Proposition 58, added a new twist. It ensured that the transfer of a home from a parent to a child wasn’t treated like a property sale. Instead, it allows the heirs of the original owner to inherit the lower property tax bill. This is why the Bridges home is still levied property taxes based on its value in the 1970s, instead of its value when the children inherited it in 2009.
The inheritance tax break allows parents to give primary residences to their children, stepchildren, adopted children, or sons- or daughters-in-law without triggering a reassessment no matter how much the home is worth. Parents also can transfer their businesses, farms, second homes and rentals provided the total assessed value is less than $1 million, something very common for properties owned a long time.