Property Tax Reassessment
Any time a transfer of California real estate is being considered, the re-assessment of property taxes must be a consideration. When property in the state is sold to an unrelated third party, a reassessment of the property at a higher tax rate is usually triggered. Other transfers of the real estate could potentially be exempt from reassessment if the transfer is correctly structured.
Understanding California reassessment rules could potentially save a significant amount in property taxes. County tax assessors assess all California real estate on January 1st with increases in the assessed value of the property being capped at 2 percent of the prior year’s value. This cap allows homeowners to pay tax on an assessed value which is less than the fair market value of the property, however a change of ownership in the property can negate the protections offered by the cap. A Palo Alto estate planning attorney can help determine the best way to protect property which could be affected by California property tax reassessment.
Exceptions Which Allow You to Avoid Tax Reassessment Penalties When Transferring Assets
Change in ownership means a transfer of the present interest in real property, which effectively removes the 2 percent cap and reassesses the property at fair market value—which in turn results in higher property taxes. It is important to understand whether your intended transfer of real property will result in a reassessment and increase in property taxes. Under California community property laws married couples are treated as a “single economic unit” by the California Revenue and Tax Code.
This means that a transfer from one spouse to the other does not result in reassessment. This interspousal transfer exception applies whether the transfer is done while both spouses are alive or following the death of one spouse during an at-death transfer. The interspousal exception is also applicable during a divorce when property is transferred to a former spouse as a part of a property settlement decree, decree of dissolution of marriage or a legal separation. Registered domestic partners fall under similar rules.
For a parent who wants to transfer California property to a child without triggering the property tax reassessment, there are two ways to do so. The principal place of residence of a parent may be transferred to a child or children without triggering the property tax reassessment (regardless of the value of the home). Other than the principal place of residence, parents may transfer real property up to $1 million, based on the assessed value of the property, rather than fair market value. These two parent-child exceptions apply to outright transfers as well as through a lifetime or testamentary trust and can be “stacked” on a per-parent basis, meaning in theory a child could receive two primary residences and two additional properties worth up to $1 million each without triggering tax reassessment. These rules can become complex, so a Santa Clara property tax reassessment lawyer could be extremely beneficial in these situations.
Instances in Which You May Be Able to Avoid Tax Reassessment Penalties When Transferring Assets
Joint ownership of real estate may avoid the necessity of probate when one owner dies if the following requirements are properly met:
- The property transfer must occur when one of the joint owners dies;
- Together, the two joint owners must own 100 percent of the property, whether as joint tenants or tenants in common.
- The surviving joint owner must obtain a 100 percent interest in the property.
- The property must have been the primary residence for both joint owners in the year immediately preceding the death of one joint owner.
- Both joint owners must have been the owners of record for the year immediately preceding the death of one joint owner.
- The surviving joint owner must sign an affidavit affirming residence at the property in questions for the year immediately preceding the death of the other joint owner.
If all these requirements are met, then there will be no property tax reassessment of the property. The second instance in which a property tax reassessment may be able to be avoided involves a transfer to a living trust during the estate planning process if the following two statements are true:
- The trust in questions is a revocable trust, and
- The person transferring the property is the present trust beneficiary.
Since most revocable living trusts become irrevocable when the trust creator dies, special problems may arise. Once the trust becomes irrevocable, the transfer essentially constitutes a change of ownership. This means the property will be subject to tax reassessment if the trust is not structured in such a way that it qualifies under the above exceptions. Further, there are certain circumstances which can cause problems, namely when there are multiple children and only some of the children want the property in question. As an example, suppose Julie leaves her home to her two children in a revocable trust. When Julie dies, only one of the children wants to keep the property, so sells his share to the other. Since this is a sibling-to-sibling transfer, the parent-child exception no longer applies, and the property will be reassessed.
Avoiding Tax Reassessment
The above scenario in which a sibling-to-sibling transfer after the death of a parent triggers a property reassessment can be avoided when the parent’s trust is structured as a non-pro-rata trust, allowing assets to be distributed among beneficiaries without a pro-rata split. This means the child who wanted the property could receive it, while the other child—who did not want the property—would receive assets of equivalent value. Property which passes from the deceased parent under a will is presumed to pass on a pro-rata basis in equal shares unless the will specifically states otherwise. When property is transferred to a business entity or a limited liability company, unless a specific exclusion applies, the transfer will almost always trigger a property tax assessment.
Fighting Tax Reassessment
If you are facing a significant increase in California property tax due to a reassessment, you can appeal by obtaining an assessment appeal application from the county assessment appeals board. You must file your appeal within 60 days of the mailing date of your notice of increase of property taxes. You will then prepare for your hearing, putting together evidence of the fair market value of your property. You will negotiate a reduced assessment with the Assessor’s Office and present your case to the board. Because it can be fairly intimidating to present your case to the board, having an experienced Contra Costa property tax attorney can help ensure the best outcome possible.
How WealthPLAN, PC Can Help with Your Tax Reassessment Issues
WealthPLAN, PC offers an unparalleled level of experience regarding California tax reassessment issues. We are always up-to-date on any new tax reassessment issues and are premier estate planning attorneys in the areas of San Jose, Santa Clara, Alameda, Palo Alto, Contra Costa and San Ramon. We see your case—and every single client case—as unique, therefore meriting individualized attention with specialized knowledge. We offer complex and advanced estate planning and litigation services, developing long-term relationships with our clients which allows them to meet their continuing estate planning needs. Contact WealthPLAN, PC today!