What to do if you inherit a rental property in Pasadena

Inheriting a rental property in California includes some interesting and quirky provisions that may not make sense from a distance but are easy to follow once you know the rules. California property taxes are very unique with a rule from 1978 called Proposition 13 that kept property taxes low for longtime owners. In Pasadena specifically, we have a rent stabilization rule set that started in 2022 called Measure H of the Charter Amendment. This set of rules gives high priority to tenant rights and in some cases supersedes an owner’s right to increase rents, take possession of the property or move into one of the units without a costly payment. If you have a tenant occupied property in Pasadena, please be careful to follow these rules and reach out for help.

Over the course of many years, I’ve learned the processes and challenges of estate planning, trust resolution, probate and court confirmations along with the additional challenges of inheriting a property with tenants where you are responsible for providing safe and habitable premisses.

First step - Pause and gather information. Among the most important issues of handling the death of a family member or friend is taking a moment to pause and give grace for them and their legacy. Then it is time to get to work and gather information including:

• Property address and details. If multiple properties, start a small spreadsheet

• Current tenant information and rental documents including leases

• Gathering vendor bills and other service costs that need to be paid monthly or quarterly

• Check for mortgages due and how the payments are processed

• Ask to receive a copy of a property profile from a local title insurance company that will show any liens, loans, additional owners, and other pertinent details

• Confirm the property tax situation and if any payments are due quickly. (Typically due in December and April)

• Access to the operating account for the property (the assumption is that a rental property has a flow of money in and out every month)

• Look for keys, storage facilities and make sure that you have secured the property as well as possible

• In some cases, I have found that a property owner was using a store room or space at a rental for storing perishable foods or dangerous items like firearms or ammunition. Make sure you look for potential dangers

• If you have a coin operated laundry on the property, determine if they are managed by a third party or the owner. A coin box can get filled and jammed if not routinely emptied

Second Step - Now that you have most of the data to keep the property operations going, you need to make some quick and easy decisions if you or your family can manage the property or if you feel you should hire a local property management company to assist. You don’t have the hire anyone right away but you should be able to make the decision based on your own self assessment of your skills and available time. That will lead to correct answers in the coming months and allow for you and your family and fellow heirs to have an understanding of the shared goals and desired outcomes.

Third step - After making a decision related to ongoing management, you have a moment to settle things and confirm a few legal and tax matters including:

• Obtain a Death Certificate and record the affidavit of death with the county

• Confirm with legal help how you wish to hold title to the property if this is going to change. You may need to probate the estate and if so, make sure that you know what you are planning to do

• Hire a licensed, local appraiser to create a report called a Day of Death evaluation. This will be important to the IRS.

• Filing the appropriate assessment documents with the LA County Assessor if you intend to make this your primary residence and want to use Proposition 13 protections related to parent/child inheritance.

• Hire a property inspection company to do a survey of the building. It is likely that there are some issues with repairs and maintenance that will be uncovered at this point. Ask them to help you figure out the core systems (Plumbing, Electric, Roof, Foundation, HVAC) and assist in looking for items that will need repairs right away vs those that can be scheduled for the future.

Fourth Step - Determining the actual business operations and upcoming changes to the property. It is almost certain that your property will be re-assessed by the county assessor. Since 2021, the implementation of Proposition 19 in California changes the rules for inherited properties to require the county to reassess the property to current market value. Because of the low increases created by Proposition 13 since 1978, you may find that your annual taxes increase by a large enough number that it wipes out your cash flow. You will want to set up some time to review all income, all expenses, all current debt structures and all current lease terms. There may be the ability to make changes now that you have the basics in steps 1, 2 and 3 completed. Pasadena rent stabilization allows for one rent increase per year and is set by the Rental Housing Board at 75% of the rate of inflation. Long term, this means you will not be able to increase rents at the same rate that your expenses will increase.

Specific items to confirm now:

• Is the mortgage loan fixed rate and for how long? If you have a property with 5 or more apartments, your mortgage is adjustable and you need to learn the schedule and expectations from the lender

• What is your current property tax basis and what will the future property tax basis be. With a day of death valuation and the county property tax tool, you can get a pretty good estimate of what to expect for costs for property taxes

• What is your baseline rental income today? For planning purposes, factor a very low rate of increases. In 2023, the allowed rental increase is 2.75% and likely will trend lower with inflation over time.

• Are any of your tenants close to or over age 60. If so, they have special rights in Pasadena and can never be asked to move if they have resided for 5 years and are over 60. Consider what your legal options may be.

• What are the other concerns and challenges discovered in earlier steps that need to be addressed in the coming 3 months, 6 months, 1 year and 3 year period. Look to your property inspection in step 3 for guidance on this.

Don’t forget to breathe!