The KRASA LAW, Inc. Estate Planning Blog

Tuesday, August 24, 2010

Maintaining Your Prop. 13 Tax Base

Most real property owners in California have at least a rudimentary understanding of Prop 13, the landmark legislation passed by voter referendum in 1978.  The concern that prompted Prop 13 was dramatically increasing property values that resulted in dramatically increasing property taxes that many homeowners couldn't afford.  Prop 13 first froze the assessed or taxable value of every Californian's home to the March 1, 1975 fair market value level.  Secondly, Prop 13 restricted annual increases in assessed value of real property to an inflation factor not to exceed 2% annually.  The idea was that all homeowners would always have predictability with respect to what their property taxes would be in a given year.

Real property may not be reassessed for property tax purposes unless there is a change in ownership or new construction.  Even if there is a change in ownership of real property, there are several important exceptions to the general rule that a change in ownership triggers reassessment.  These exceptions must be carefully considered when property owners contemplate transferring property either by lifetime gift or by a bequest upon death.

One of the most common exceptions to the change in ownership rule is transfers of real property into or out of a Revocable Living Trust.  Most Estate Plans in California are based upon Revocable Living Trusts which require property owners to re-title their properties into their Trusts.  Transferring title into or out of a Revocable Living Trust does not impact a property owner's Prop 13 tax base.

Another common exception is transfers between spouses.  A husband and a wife may transfer real property between themselves without having to worry about triggering a reassessment. 

Transfers of a principal residence from a parent to a child or from a child to a parent are exempt from a reassessment under Prop 13.  Transfers of additional real property up to $1 million in assessed value are also exempt from a reassessment.  It is important to note that the $1 million limitation on transfers of additional real property is based on assessed value, not fair market value.  If real property has been owned for a long time, there is likely a dramatic difference between the very low assessed value and the very high fair market value. 

Although there is an exemption from reassessment for a transfer between a parent and a child, there is no exemption from reassessment from a transfer from a sibling to a sibling.  Therefore, if for example a parent dies and leaves all of her property to her two children 50/50 and only one child wants to keep the house, it is crucial that the house gets transferred out of the estate 100% to the child who wants to keep the house and other assets of equal value be transferred out of the estate to the other child. 

There is also a very limited exemption for certain transfers between a grandparent and a grandchild.

Anybody transferring real property must be keenly aware of the Prop 13 issues in order to avoid an unnecessary reassessment which could result in a dramatic property tax increase for as long as the property is owned.  In addition, certain forms must be filled out and filed with the County in order to claim the exemptions discussed above.  Many property owners make the mistake of transferring real properties without proper guidance, unnecessarily creating a reassessment. 

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