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Claiming the Property Tax Reassessment Exclusion Thursday, December 22, 2016

Real property that is not entitled to special exemption is valued at the base-year value determined under Proposition 13 guidelines, adjusted for inflation. As provided in Article XIIIA of the CA Constitution, the property tax rate is generally 1% of assessed value, and cannot be increased by more than 2% per year. When property changes hands and a “change in ownership” event occurs, the property taxes are reassessed, unless subject to a reassessment exclusion.

CA Revenue and Taxation section 62 describes transfers which are excluded from “change in ownership.”
Some of those are:

  • Transfers in which proportional ownership interests remain the same before and after transfer.
  • Transfers into and out of revocable trusts.
  • Transfers between spouses or registered domestic partners
  • Transfers between parents and children of a personal residence, plus $1 million of “full cash of the property. Two parents may each transfer $1 million to their children.Therefore, the total exclusion is $2 million per couple couple Forthese purposes, “full cash value” means assessed value, not fair market value.
  • Transfers between grandparents and grandchildren, when all parents of the grandchildren are deceased as of the date of sale or transfer.
  • Transfers of ownership interests in legal entities
  • Base-year value transfers to replacement property for persons over age 55, and disabled persons, persons displaced by governmental action or eminent domain, and property substantially damaged or destroyed by a disaster.

Transfers which are NOT excluded from property tax reassessment are Sibling to Sibling Transfers

To preserve the full parent-child exclusion and avoid creating undivided interests (when undivided interests are not otherwise desirable for future estate planning purposes), the trustee or personal representative may need to encumber the decedent’s property before distribution. For example, if trust property consisting of $250,000 in cash and an unencumbered residence with a fair market value of $750,000 is to be divided equally between two children, and the trustee mortgages the property for $250,000 and then distributes the encumbered property (with a net value of $500,000) to one child and $500,000 in cash to the other, then 100 percent of the residence will be exempt from reassessment because the distribution of the residence will be treated as a parent-child transfer, provided that the trust instrument does not prohibit the trustee from making non prorate distributions.

If instead the trustee distributes $250,000 in cash and a one-third interest in the residence (with a value of $250,000) to one child and distributes a two-thirds interest in the residence (with a value of $500,000) to the other, and the child receiving the two-thirds interest acquires the remaining one-third interest in the property from the other in exchange for a $250,000 promissory note, then one-third of the property will be reassessed because the child will be treated as receiving one-third of the property  from the other child rather than the parent. (Annotation 625.0235.005 on the State Board of Equalization website at http://www.boe.ca.gov). The State Board of Equalization has given informal advice that the trustee may borrow the money needed to fund the cash gifts from the recipients of the gifts in exchange for promissory notes secured by a deed of trust on the property but the trustee may not take back a deed of trust from the child receiving the property and assign the deed of trust to the other children in lieu of cash gifts.

To claim the exemption, a Claim for Reassessment Exclusion must be filed with the County Assessor within 3 years after the transfer or within 6 months after the mailing of a notice of supplemental or escape assessment.  In some specific circumstances the Assessor may accept, in their discretion, protective or amended claims when a claim must be filed before all the information is known. Such claim should be marked as “Protective Claim” or “Amended Claim,” as the case may be, and a letter of explanation should accompany the Claim.

The parent-child exclusion does not apply to a sibling transfer even if the property is transferred directly to the child from the estate or trust. Generally, a devise of property to more than one person vests property in them as tenants in common. A transfer of interests among tenants in common is a change in ownership unless an exclusion applies. Therefore, nonprorata allocation of property to children may result in reassessment of the property tax.

However, where a trust provides for nonprorata allocations, if each beneficiary receives an amount equal to the beneficiary’s share of trust assets, the transfer will be treated as a direct transfer from parents to children.

Change in Control.CA Revenue and Taxation Section 64 et seq. provides that change in control results in a change of ownership if a corporation, partnership, LLC, or other legal entity or person obtains through indirect ownership more than 50 % of the total capital or profits interests in a partnership or LLC. However, there is no attribution of ownership between spouses who acquire interests in a legal entity. As such, no change in control of XYZ (an LLC) would occur under if A and B, who are married to each other, acquire 100 percent of the ownership interests in XYZ as community property.

Transfers on Death . Within 150 days of a decedent’s death, even when the decedent’s property was titled in a Trust, the Trustee (or, where no Trust – the Estate Representative of the deceased property owner) must file a Change in Ownership Statement with the County Assessor in each county in which the decedent owned real property. Failure to file this form timely may result in significant penalties of either $100 or 10% of the taxes applicable to the new base year value of the real property, whichever is greater, not to exceed $5,000 if the property is eligible for the homeowner’s exemption, or $20,000 if the property is not eligible for the homeowners’ exemption, and if that failure to file was not willful. This penalty is added to the assessment roll and is collected like any other delinquent property taxes and subject to the same penalties for nonpayment.

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