Orange County

AOA News and Buyers Guide • Orange County • March 2021 • (714) 539-6000 57 there could still be a crippling tax increase depending on the assessed value of the property. All investment property, even if the child plans to live in it, will be reassessed to full current market value upon transfer. This is potentially the largest property tax increase in California history. This could mean that your children will need to sell the home they were born and raised in, sell a treasured vacation house that has been in the family for generations, or be forced to liquidate a portfolio of investment properties that was carefully amassed over a lifetime. This will hurt families financially and emotionally, as many of these homes house childhood memories and long-standing family traditions, and/or are an important source of income for heirs. There is Hope The hope amidst this government tax increase could be in the new rules around Accessory Dwelling Units (ADUs). ADUs are small, secondary residenc - es built on a residential-zoned single-family home or multi-family building, and could be the solution to keeping real estate in the family. An ADU can be a stand-alone or attached structure that is added to a property, or the conversion of an existing space such as a garage, storage room, basement or attic. While the impetus for the state allowing ADUs to be built is to try to create more affordable housing, this relatively new law could also help the heirs of property owners to offset the increased tax basis by allowing them to add rental income to the property. By adding an ADU to your primary residence, secondary vacation house or investment property, you have the opportunity to create additional income that could offset tax increases and add value to the prop - erty. Part of this good news is that you don’t need to rent out the ADU if you don’t want to. While you may not need this additional income right now, and you may not want a tenant renting an ADU at your primary residence, by taking advantage of the current law and creating a permitted ADU on your home, you are opening up the option for your kids to be able to derive extra income from the property when they in - herit it. Future generations would even have the option of living in the ADU and renting out the home or even having one sibling living in the primary residence and one in the ADU. Same for a secondary vacation house that perhaps has been passed down from one genera - tion to another. Converting a space into a rental or adding an ADU allows for (additional) income from the property which could make it financially feasible for the heirs to keep the property. Conclusion Families have worked hard to acquire their real es - tate portfolio, and many parents take joy in knowing that their properties will be passed down to their chil - dren. Building an ADU is one way that parents can offset the increased tax basis so that the kids aren’t bur - dened by taxes that they may not be able to afford. Mercedes Shaffer is an agent with Pacific So - theby’s International Realty and specializes in invest- ment real estate and 1031 Exchanges.  For help with buying or selling investment property, Mercedes can be reached by phone at 714.330.9999, by email at [email protected] or visit her website at   DRE 02114448 . “We worry so you don’t have to.” 10% OFF ANY Air Conditioning or Heating Repair 888-573-5293 Lic.# 917357