Closing a tax loophole would raise billions

Report looks at effects of ending a break on inheritances of rental and vacation homes.

SACRAMENTO — Eliminating California’s inheritance tax break for vacation houses and rental property and restricting its use for primary homes could raise $2 billion a year in property taxes over time, according to a new analysis.

The tax break was the subject of a recent Times investigation that found wealthy heirs across the state had received large tax benefits from inherited property and that the majority of heirs had not reported their homes as their primary residence.

For instance, actor Jeff Bridges and his siblings would have paid an additional $300,000 in property taxes if their Malibu beach property had been reassessed when they inherited it nine years ago. This year, the family listed the home for rent at $15,995 a month.

The report from the state’s nonpartisan Legislative Analyst’s Office studied the effects of requiring heirs to live in their parents’ home to receive the tax break and limiting the benefit to the first $1 million in taxable value for primary residences. The analyst estimated these changes would increase property taxes for 40,000 to

60,000 inherited properties each year.

“This, in turn, would increase property tax revenues for local governments,” the report said.

The analyst estimated schools and other local governments would receive more than $200 million combined annually to start, with that amount growing to $2 billion annually over time.

The inheritance tax break was examined as part of an analysis of the fiscal effects of a potential November 2020 ballot measure sponsored by the California Assn. of Realtors.

The organization wants to make changes to the tax break as part of broader initiative to extend property tax benefits for homeowners 55 and older and clamp down on businesses that avoid higher property taxes when they buy commercial real estate.

Steve White, president of the California Assn. of Realtors, said the state should preserve inheritance benefits for children who want to live in their parents’ homes — but that’s it.

“If it’s going to be rental, if it’s going to be business, it should be treated differently,” White said.

Assemblyman David Chiu (D-San Francisco), the head of the Assembly Committee on Housing and Community Development, is also looking at potential changes to the inheritance tax break for when the Legislature reconvenes in January. He called the legislative analyst’s findings on potential revenue that could be raised by curtailing the tax break “enormous.”

“We need to have a legislative discussion on closing the [inheritance tax break] loophole and the best use of these dollars,” Chiu said.