Forms of Ownership: Entity Ownership

A legal entity is an artificial legal person and it has legal capacity like an individual. It can:

1. Enter into agreements or contracts;
2. Assume obligations;
3. Incur and pay debts and loans;
4. Sue others and can be sued;
5. Be held responsible for its actions; and
6. Contract for purchase, sale, or lease of real property.
Just like a real person, a legal entity’s interests in real property may be owned individually, owned by another legal entity, or held in trust. Some of the most common examples of legal entities holding title to real property in California are:

1. Corporations,
2. Partnerships,
3. Limited liability companies,
4. Joint ventures,
5. Massachusetts business trusts, and
6. Real estate investment trusts.

Change in ownership for legal entities

In general, transfers of corporate voting stock, partnership ownership interests, LLC membership interests, or ownership interests in other legal entities are not changes in ownership of the real property owned by the entity.

The above general rule does not apply to three exceptions:

1. A transfer of an ownership interest in a legal entity that shifts control of the entity;
2. A transfer of an ownership interest in a legal entity by an original co-owner resulting into a cumulative transfer of more than 50 percent of all the interests held by original co-owners; and
3. A transfer of shares in a cooperative housing corporation.
In general, there are two types of transfers involving legal entities that result in a change in ownership for the purpose of Property Tax in California:

1. The transfer of interest in real property to and by a legal entity; and
2. The transfer of ownership interest in a legal entity that owns real property.
The first type of transfer involves a transfer of an interest in real property between legal entities i.e. between a corporation, partnership, LLC, or other entity, etc. The transfers also include transfers between a legal entity and its shareholders.
The second type of transfer involves transfer of ownership interest in a legal entity. The real property is in ownership of the legal entity before and after this type of transfer. Only the ownership interests of the legal entity change.

Both type of transfers trigger a change in ownership of the real property owned by the legal entity. Therefore, the property held by the legal entity attracts reassessment based of change in ownership.

Illustration

Mr. Arthur Andrews, Mrs. Ava Andrews, and their daughter Ashley Andrews owns 51%, 39% and 10% shares in a legal entity. The legal entity owns a real property worth $660,000. Who owns the legal entity? Who controls it? Who owns the real property? And who controls the real property? 

What should Mr. Andrews do if he wants to shift the control of the property to his wife, Ava?

The situation is best explained using a diagram:

Diagram 01

Mr. Andrew Arthur 51% Shares Mrs. Ava Andrew 39% Shares Miss Ashley Andrew 10% Shares	----	Family of Mr. Andrew Arthur owns the legal entity.
­ I
Ownership of legal entity
­ I
Legal Entity	----	The legal entity owns the real property
­ I
Ownership of Real property
­ I
Real Property	----	The real property to be assessed for Property Tax.

Arthur Andrews, his wife, and his daughter owns the legal entity as shown in the diagram. However, effective control on the administration of the legal entity requires ownership of more than 50% share. Therefore, Mr. Andrews controls the legal entity; he has 51% shares in ownership of the entity.

If Mr. Andrews wants to shift the control of real property to his wife, Ava, he will have to transfer 12% or more of his shares in the legal entity to her. Mrs. Andrews will have more than 50% shares in the legal entity then and she will effectively control the property owned by the legal entity. In such transfers of control as transfer of ownership of a legal entity, there is no change of ownership of a real property in strict sense of such a change. However, effective control of the real property changes hands from one person to another, namely from Arthur Andrews to his wife Ava Andrews.
The legal entity owns the real property, but it has its own owner controlling it – Mr. Andrews. Thus, Mr. Andrews controls the property without having a direct ownership of the property.

The county assessor understands this possibility of control through legal entity. The Revenue and Taxation Code allows the county assessor to treat this type of indirect control and its transfer as ownership and change in ownership respectively.

Illustration

Zara owns 60% of the voting stock of the Asian Logistics Corporation. The Asian Logistics Corporation owns three warehouse in California worth $3.0 Million, $3.2 Million and $2.0 Million. The current fair market value of these warehouses is about ten times more than the acquired values of the warehouses in 2007. Zara wants to leave the country after selling voting stock to her husband, Smith, and one of her business fellow, Nathan. Nathan and Smith already have 30% and 10% voting stock of the corporation. Which of the following options will not trigger reassessment of the underlying property of the corporation: 

1. Zara transfers 60% voting stock to Nathan?
2. She transfers voting stock to Smith and Nathan 30% each?
3. She transfers 45% voting stock to Smith and 15% to Nathan?

In option 1, the control of the corporation will be transferred to Nathan and the warehouses owned by the corporation will be reappraised. Since, the fair market values of these warehouses are about ten times larger than there acquisition values in 2007, Property Tax increase will also be huge.

The Option 2 will also produce the same results.
In Option 3, the control of the corporation will be transferred to Smith, her spouse, the change in ownership will qualify for inter-spousal transfer exclusion.

Illustration

Three brothers, Joseph, Jose, and Jeremy created a partnership for starting a retail store in a rented building. Subsequently, the partnership purchased the store’s land and building. Joseph owns 51%, Jose owns 48%, and Jeremy owns 1% of the partnership. The partnership has a continuing clause so that the partnership does not terminate if any of the brothers dies. 

After two years, Joseph died in an accident. Upon death, his will gave 10% interest to his brother Jose, and 41% interest to his son David. 

Will the property owned by the partnership be reappraised by the County Assessor?

The control of the partnership has shifted from Joseph to Jose. This change in control is sufficient to constitute a change in ownership and to trigger reassessment of the underlying land and building of the store by the County Assessor.

Forms of Ownership: Joint Tenancy

Perhaps the most confusing type of Individual ownership when it comes to property taxes is Joint Tenancy, which is different from Tenancy in Common discussed in an earlier post.

Joint tenancy

Like Tenancy in common, joint tenancy is also a form of concurrent ownership in real property. However, joint tenancy is characterized by equal undivided interests in property. If the interests of the owners are not equal, it will not be a joint tenancy.

In the joint tenancy form of ownership, the owners are called co-owners, co-tenants, or joint tenants. A joint tenant has an equal share of the property and is entitled to the simultaneous possession of real property.

A joint tenant has a right of survivorship. This means that upon death of the joint tenant, his or her interest in the property is equally divided and transferred to the remaining joint tenants. There is no need to transfer the interest of a deceased joint tenant. The transfer of interest occurs automatically by operation of law.

Since, the property in joint tenancy transfer automatically on death of a joint tenant, there occurs a change in ownership when a joint tenant dies. Subject to conditions, this change in ownership on death of a joint tenant may or may not result into reappraisal of property held as joint tenancy.

Illustration

Sheila, Sara, and Shirley acquired property in 2000 as joint tenants. Sara died in 2002 and Shirley died in 2006.1. What is the share of property transferred in 2002, and 2006?2. What percentage of ownership each survivor had in 2002, and 2006?

At the time of acquiring property, Sheila, Sara, and Shirley were joint tenants; therefore, each of them has an undivided 1/3 interest in the property.

The death of Sara in 2002, resulted in a change in ownership of 1/3 of the property i.e. Sara’s share.

When Sara died in 2002, her joint tenancy interest automatically passed equally to Sheila and Shirley. They were remaining joint tenants. Each of them had an undivided 50 percent interest in property.

When Shirley died in 2006, her joint tenancy interest automatically passed entirely to Sheila. She automatically became the sole owner of the property.

The death of Shirley in 2006 resulted in a change in ownership of 50% of the property i.e. Shirley’s share in 2006.

Joint tenancy and change in ownership

The creation, transfer, and termination of a joint tenancy interest are changes in ownership in the interest transferred. Upon a change in ownership of a joint tenancy interest, only the transferred interest is reappraised.

Illustration

Identify change of ownership and the extent of change in ownership for the purpose of reappraisal in following cases:

1. Mr. Salmon and his wife Sally purchased property as joint tenants from Angelina.

2. Julia and David Bond were joint owner of property. They sold the property to Kelly and Natalia as joint tenants. 

3. Cara Edwards and Hugh Crawford were joint owners of property. Cara sold her share to David.

In situation at serial No. 1, the transfer is a change in ownership of entire (100%) property.

In situation at serial No. 2, the transfer is also a change in ownership of entire (100%) property.

In situation at serial No. 3, the transfer is a change in ownership of ½ (50%) share sold by Cara to David.

All three changes in ownership will be appraised to the extent of transfer of share unless an exclusion applies.

Illustration

Maria owns property as a sole owner. She transfer her property to herself and her friends Sally and John as joint tenants. Is it a transfer for the purpose of Property Tax? Will it trigger reappraisal?

The transfer to herself and her friends as joint tenants gives Maria the status of original transferor. The property stands transferred, but it will not be reappraised. The original transferor exclusion will apply.

There are several advantages of obtaining original transferor status including exclusion i.e. no reappraisal despite transfer of the property.  In addition, the transaction that creates the status of the original transferor and subsequent transfers to others do not result in a change in ownership as long as original co-owner is on title.

Co-owners and joint tenants can obtain original transferor status in two ways:

1. When the co-owners transfer property held as tenants in common to themselves and others as joint tenants without adding an additional owner from outside as joint tenant; and

2. When the joint tenants transfer their joint tenancy interests to their revocable trusts for the benefit of all of the other joint tenants i.e. all of them are beneficiary.

Illustration

Kelly is the sole owner of a property worth $600,000. Due to pressing financial need, she deeds the property to herself, Kales, and Somali as joint tenants. Kelly is an original transferor, and Kales and Somali are other than original transferors.

Subsequently, Kales transfers her interest to Kelly and Somali.

Is the first transfer a change in ownership? Will the subsequent transfer trigger reappraisal or partial reappraisal?

No transfer is change in ownership because these transfers include original transferor as a joint tenant in the resulting joint tenancy. Hence, the original transferor remains on title. Since, there is no change in ownership, there will be no reappraisal of the property.

To create original transferor status, all the transferors must on title to the joint tenancy i.e. they are among the transferee joint tenants. If a transferor is not on title after the transfer, no transferor will obtain original transferor status.

Illustration

Cara and Martha owned a property as tenants in common. The Assessed Value of this property for the year 2012-13 was $ 420,000. They paid $ 4,600 Property Tax in 2012-13. Subsequently, they transferred the property to Martha, Lolita, and Marry as joint tenants.

1. If the fair market value of the property is $810,000, how much Property Tax is to be paid for year 2013-14? Two percent adjustment is applicable. 

2. How much Property Tax will be payable if Cara is among the transferees after the transfer?

In situation 1 Cara is not among the transferees. Therefore, Martha does not become an original transferor. The transferees are merely joint tenants. Since, Martha was previous owner, only the transfer to Lolita, and Marry results in a 2/3 change in ownership. Hence, 2/3 of the property will be reappraised at current fair market value.

In this situation, 1/3 of the property will not undergo a reappraisal. It is 1/3 undivided share of Martha who was a previous owner of ½ share. The old assessed Value is $420,000.

The County Assessor will reassess new value of 2/3 share of Lolita, and Marry at fair market value i.e. 2/3 of $ 810,000.

Assessed Value and Property Tax 2013-14
Share of Martha 1/3 ($420,000 X 1/3)	$ 14,000
Adjustment 2%	$280
Share of Lolita, and Marry 2/3 (810,000X2/3)	$540,000
Total Assessed Value	$554,280
Property Tax @1%	$5542.80

In situation 2, Cara is among the transferees. Therefore, Martha becomes an original transferor. The transferees are joint tenants and original transferor. Here, exclusion of original transferor will apply and no reappraisal will follow.

In this situation, the old Assessed Value will remain applicable. Only adjustment will be 2% for inflation as given in the illustration.

Assessed Value and Property Tax for 2013-14
Previous Assessed Value	$420,000
Adjustment for inflation	$8400
Total Assessed Value	$428400
Property Tax @1%	$4284

One important point to note about original transferor exclusion is that when the interest of the last surviving original transferor is terminated, the entire property will be subject to reappraisal.

Illustration

Sheila, Jack, Thomas and Nina were old college friends. After retirement they wanted to live together in a property owned by Sheila and Jack. In 2000, Sheila and Jack transferred the property to themselves, Thomas, and Nina as joint tenants.

Sheila died in 2010, Thomas died in 2011, and Jack died in 2012.
When will the property be reappraised for Property Tax purpose if there is any need of the reappraisal under the law?

In 2010 when Sheila died, she was an original transferor; therefore, there was no need of reappraisal because of original transferor exclusion.

In 2011 when Thomas died, an original transferor, Jack, was on title; therefore, there was no need of reappraisal because of original transferor exclusion.

In 2012 when Jack died, no original transferor remained on title. Therefore, entire property will be reappraised because original transferor exclusion will not be applicable.

A spouse of an original transferor can also become original transferor if the spouse acquires an interest in a joint tenancy property during the time the original transferor was on title. The spouse will be considered if the spouse acquires an interest in the joint tenancy property by means of a transfer from the original transferor.

Illustration

Callas and Byre were joint tenants and they transferred their property to Callas, Byre, Cara, and Diana as joint tenants. Diana is Callas’ wife.

Who should come off the title to trigger reassessment of the property?

The transfer in the situation is not a change in ownership because transferors Callas and Byre are among the resulting joint tenants as original transferors.

Diana has also become an original transferor because she is wife of Callas and she received her interest by way of a transfer during life time of Callas.

Only Cara is an “other than original transferor”. Therefore, property will be subject to 100 percent reassessment when Callas, Byre, and Diana come off title. When they will not be on title Cara will be the sole owner to face reappraisal of the property.

Avoiding Reassessment and Reporting Changes in Ownership

While using one of the previously discussed exclusions from reassessment is often the best way to avoid an increase in property taxes, they are not always available. There is an additional method available to some owners, called a Base Year Value transfer, that can be used, as well as some cases where a transfer does not trigger a change in ownership at all.

Base Year Value transfers

The California Constitution allows persons who are over the age of 55 or disabled to sell a principal place of residence and transfer the Base Year Value of the property to a new residence. The old property is called the original property and the new property is called the replacement residence. The transfer of base year value from the original property to the replacement residence is subject to certain conditions. The conditions are as follows:

1. The claimant is age 55 or over;

2. The claimant is severely and permanently disabled;

3. The original property of the claimant is sold and reassessed to current market value;

4. The replacement dwelling is purchased or newly constructed within two years of the sale of the original property;

5. Both the new and sold property are in the same county;

6. The replacement dwelling is of equal or lesser value than the original property.

Illustration

Luis, who is over 55, has transferred his current principal residence to Noah. Luis wants transfer the base year value of his residence to a qualified replacement dwelling. The current market value of his principal residence is $500,000. Will he be allowed to transfer the Base Year Value $71,000 of his original property to replacement dwelling if the current market value of the replacement dwelling is $4,500,000? Or $380,000?

Assuming all other conditions are met, he will be allowed to get the Base Year Value transferred if it is $380,000 i.e. less than the current fair market value of his principal residence.

In general, an individual can transfer his or her Base Year Value only once. In addition, if a claimant makes a transfer and his or her spouse is also an owner of the replacement dwelling, the spouse will also be prevented from making a future claim for transfer of Base Year Value. However, if a claimant becomes severely and permanently disabled after using the one-time benefit on the basis of age, the claimant or the claimant's spouse is eligible for a second Base Year Value transfer for disabled persons.

Transfers that are not change in ownership

Some transfers of title to real property are not change in ownership. This is because they do not meet the requirement of the law to qualify as a transfer for the purpose of property taxes. These transfer often involve recorded deeds or other evidence of transfers of real property, but they do not represent changes in ownership. Hence, even if these transfers occur, they do not trigger reassessment real property. These transfers include:

1. Transfer of only bare legal title without the transfer of beneficial interest associated with the property;
2. Transfer to perfect title, or correct a deed for reflecting intentions of the parties;
3. Transfers to create a security interest not coupled with the right to use like a security for a loan; and
4. Transfer for sale and leaseback arrangement as a financing mechanism.

Illustration

The Investment Needs LLC extended a loan amounting to $44,000 to Ms. Sheila Juwan, a young entrepreneur in 2013. As a security, Sheila transferred the title to her apartment worth $90,000 in the name of The Investment Needs LLC, but the apartment remained in her possession and use. If the Assessed Value of her apartment was $20,000 in 2012-13, what will be the new Assessed Value of her apartment in 2013-14?

The property stands transferred in the name of the Investment Needs LLC, but the treatment of the transfer for the purpose of Property Tax is different. The transfer is NOT a change in ownership because its purpose is creation of security interest without beneficial use of the property. Therefore, the Assessed Value of Ms. Sheila Juwan’s apartment will remain $20,000 plus 2% adjustment for inflation i.e. $20,400.

Reporting changes in ownership

The transferees, in cases of changes in ownership of properties, report the changes by filing the Change in Ownership Statement with the County Assessor.

Change in ownership statement

The Revenue and Taxation Code has made you responsible for reporting change of ownership of your property if you are a transferee in case of property transfer. In such cases, as case of change in ownership, you are to file a Change in Ownership Statement (COS). The Change in Ownership Statement is filed with the County Assessor of the county in which your real property is located.

The period of filing a Change in Ownership Statement has also been specified by the code. You must filed the statement:

1. At the time of recording the transfer of property; or

2. Within 90 days of the date of the change in ownership if the transfer is not recorded.

The Change in Ownership Statement contains information important for calculating Assessed Value and effective date of the new Assessed Value. Moreover, it facilitate the County Assessor in understanding the nature of property and transfer to make decision regarding exclusions. The essential information on the Change in Ownership Statement includes:

1. A description of the property;

2. The date of transfer;

3. The parties to the transaction;

4. The amount of consideration paid for the property (if any); and

5. The terms of the transaction.

The owner of real property signs the Change in Ownership Statement under penalty of perjury. However, the signing requirement is not needed if the Change in Ownership Statement accompanies the deed or other transfer document evidencing a change in ownership.

You may have to pay a penalty for failing to file the Change in Ownership Statement. It is because the law authorizes a County Assessor to impose a penalty for failure to file the Change in Ownership Statements.

The Revenue and Taxation Code also requires filing of the Change in Ownership Statement to report changes in control of legal entities owning properties.

County Assessors use the information reported on Change in Ownership statement to determine whether:

1. A transfer is a change in ownership;

2. A change in ownership meets one of the exclusions; and

3. The purchase price reflects fair market value.

Avoiding change in ownership: Exclusions and other transfers

Avoiding change in ownership: Exclusions and other transfers

Not all changes in ownership of property attract reassessment. Exclusions are types of transfers which do not trigger reassessment of your property for Property Tax purposes. Because a reassessment of your property will almost always result in an increase of its assessed value, and because Property Taxes are based on the assessed value, using these exclusions can be a great way to keep your Property Tax from increasing, sometimes dramatically.

Also, don’t forget that not all transfers of property result in a change in ownership. Even if these transfers take place, they will not trigger reassessment of your property for Property Tax purposes.

Exclusions

Some transfers are excluded from change in ownership by law. If transfer of title to a real property occurs through these transfers, i.e. exclusions, the transferred property is not reassessed to current market value on changing its ownership. Some specific examples of change in ownership exclusions are:

1. The inter-spousal transfer exclusion;

2. The registered domestic partner exclusion;

3. The parent-child exclusion;

4. The grandparent-grandchild exclusion; and

5. Original transferor exclusion.

Inter-spousal Transfer Exclusion

Transfer of property to a spouse is a change in ownership. However, such transfers do not trigger reappraisal of the transferred property because of Inter-spousal Exclusions.

Illustration

Aaron and Zoey has planned to marry this year. Aaron wants to give Zoey a long held property as a wedding present. Should he transfer the property to Zoey before marriage to avoid Property Tax increase?

Aaron should wait. He needs to gift the property after the marriage takes place in order to qualify for an inter-spousal transfer exclusion. Since the property is a long held property, it is likely to have a much lower Assessed Value than its current fair market value. Therefore, if it is assessed at current market value, Aaron will pay a much higher Property Tax bill!

The registered domestic partner exclusion

The registered domestic partner exclusion is very similar to the inter-spousal transfer exclusion. However, it only applies to purchases or transfers between persons who are registered domestic partners with the California Secretary of State.

The parent-child exclusion and the grandparent-grandchild exclusions

In much the same way that properties can be transferred between spouses and registered domestic partners, they can also be transferred from a parent to a child, or from a grandparent to a grandchild, without triggering reassessment of the property value.

Illustration

Which of the following transfers will trigger reappraisal of the transferred property?

1. Maria transfers her property to her husband Logan;

2. William deeds his long held property to Brandon, his registered domestic partner; and

3. Alyssa transfers her house to her daughter Marry.

None of these properties will be reappraised. In the above cases, inter-spousal, registered domestic partner, and parent child exclusions will apply respectively.

Original transferor exclusion

An original transferor is a person who creates a joint tenancy. For example, Edward creates a joint tenancy when he transfers his real property to others and remains among the resulting joint tenants. Edward will then be an original transferor.  All joint tenants other than an original transferors are referred to as other than original transferors.

In joint tenancy form of ownership, following transfers are exclusions:

1. Transfers that create a joint tenancy interest if after such transfer the original transferor is on title;

2. Transfers that transfers a joint tenancy interest if after such transfer the original transferor is on title;

3. Transfers that are transfers back to an original transferor; and

4. Transfers that transfers property to all of the remaining joint tenants and one or more of the remaining joint tenant is an original transferor.

Illustration

Identify the change in ownership and exclusions from the following transfers of real property.

1. Isadora Brubeck deeds out his office to his son Robert.

2. To finance her business, Aimee sold her condominium to a real estate agent for further sale.

3. Sally gifted a small house to her friend, Lincoln, on his birthday.

4. David gifted one of his houses to his wife Myra on her 29^th birthday.

1 and 4 are change in ownership and exclusions. 2 and 3 are change in ownership. Only 2 and 3 will result in reappraisal of the property.

Joint tenancy, and other forms of ownership, will be discussed more in-depth in a future post.

Forms of Ownership: Individual Ownership

There are two basic forms of ownership, individual ownership and entity ownership. Note that ownership by a single legal entity qualifies as individual ownership.

You can hold individual ownership in property in four basic ways:

1. Sole ownership,
2. Tenancy in common,
3. Joint tenancy, and
4. Community property.

The first two of these will be discussed in this article. The others are more complex, and will be covered separately.

Sole ownership

Sole ownership of a real property means that the property has a single person as owner. Sole ownership is also called ownership in severalty. A property owned by a single legal entity is also an example of sole ownership. The entity may be a corporation, partnership, and limited liability company, etc. In sole ownership form of property ownership no division of the bundle of property rights is involved.

The transfer in ownership in sole ownership is easy to identify as change in ownership. It is also easier to identify whether an exclusion applies.

Illustration

Identify change in ownership and exclusions in following cases of property transfers:

1. Nathan sells his house to his brother Noah;
2. Sofia gifts her property to her husband William;
3. Wallis sells his property to Konya Industries Inc.; and
4. Maria & Maria LLC transfers a property to its C.E.O Matthew.

Examples 1, 3, and 4 are change in ownership that will trigger reassessment of the property’s value. Only example 2 is an exclusion, the Inter-spousal Transfer Exclusion, and would not be reassessed.

Tenancy in common

Tenancy in common is the default form of co-ownership in California. A common way that give birth to a tenancy in common is a situation in which a grantor conveys property to two or more individuals without specifying the form of co-ownership. The grantees take title as tenants in common and they have an undivided interest in the transferred property.

Tenancy in common is a flexible form of ownership; in it the ownership interests of owners in real property may be equal, or may vary in size from owner to owner. No matter how small an ownership interest you have in property, it is your undivided interest in the property. In addition, you enjoy unity of possession; you and other common tenants have the right to use the entire property and no co-tenant can keep the other owners out.

One point to note is that tenants in common share property’s expenses in proportion to their percentage of ownership. The Property Tax is also an expense for the owners and, therefore, they share it in percentage of their ownership.
As long as there is no change in ownership in the ownership share held in the property, no reassessment question arises. However, change in ownership attracts reassessment for the purpose of Property Tax.

Illustration

Emily, Mia, and Emma own real property worth $1,400,000. They own the property as a tenancy in common and have 70%, 20%, and 10% shares. If Mia sold her share to her friend Madison, what will happen to the assessment of the property for Property Tax?

The property will be reappraised and reassessed to the extent of share transferred i.e. 20% share of Mia transferred to Madison. In this example, if the reappraised value of the property was $2,000,000, the new assessment would be:

Initial Value                    $1,400,000
Transferred value          $1,400,000 x 20% = $280,000
Reappraised value        $2,000,000
New transferred value   $2,000,000 x 20% = $400,000
Reassessed value         $1,400,000 + ($400,000 - $280,000) = $1,520,000


Even though its actual appraised value is now $2,000,000, after the sale the property will be taxed based on a value of $1,520,000 because there was only a 20% change in ownership.

California Property Tax: Change in ownership 01

Change in ownership

One of the most significant increases in property tax that most people will see happens during a change in ownership. It is vital to understand how a change in ownership can affect your property taxes.

The California Legislature defined change in ownership as “a transfer of a present interest in real property including the beneficial use thereof the value of which is substantially equal to the value of the fee interest.”

Identifying a change in ownership is simple and easy when a piece of real property is directly sold from one individual to another, or from one entity (such as a corporation) to another. However, the transaction of change in ownership is not that simple and straightforward in all cases; it may involve partial ownership interest in a single piece of real property, and other complex transaction among individuals, trusts, and corporations, etc. For example, the transfer of ownership interests in a legal entity like corporation may have effect of a ‘‘change in ownership’’ of the corporation’s underlying real property.

It is important to note that the change in ownership is different for the purpose of Property Taxes than the change of ownership for obtaining title of real property. Be aware that:

Transfers of real property do not necessarily result in a change in ownership of the real property, and it is possible for a change in ownership to occur without transfer of title to the real property.

Irrespective of its treatment in Property Tax law, a transfer of property may be a voluntary or involuntary transfer. It may take place by operation of law or may be a result of:

    1. A purchase or sale whether recorded or not;
2. A grant;
3. A gift, i.e. a real property given willingly to someone without payment;
4. Devise through inheritance or through a trust;
5. An addition of an owner to the existing the owners of a real property;
6. A deletion of the existing owners of a real property; or
Property settlement.

A transfer of a real property may take place with or without consideration. Consideration is something of value, e.g. another real property that may be exchanged for the property. Other examples of consideration include money, the assumption of a debt, the cancellation of an outstanding debt, the creation of a debt, etc.

Illustration

Identify transfer of real property in the following cases:

1. Ms. Samantha sold her house to Mr. Ethan Alexander for $ 150,000 in cash;

2. Mr. Julian Jacob gifted his farm house worth $ 345,000 to his wife Olivia; and

3. Sophia transferred her house to her daughter Chloe through a sales deed.

The sale of house from Ms. Samantha to Mr. Ethan Alexander for $150,000 in cash is a transfer. It is also a change in ownership, and it is not an exclusion. Therefore, it will trigger reassessment of the property.

The gift of farm house from Mr. Julian Jacob to his wife Olivia is a transfer. It is a change in ownership, but it is an exclusion namely, Inter-spousal transfer. It will not trigger reassessment of the farm house.

The transfer of the house from Sophia to her daughter Chloe through a sales deed is a transfer and change in ownership. It is a change in ownership, but it is an exclusion namely, parent child transfer. It will not trigger reassessment of the house.

How change in ownership can increase Property Tax Bills

A Country Assessor assesses Assessed Value of your property at Base Year Value of 1975, and does not change it without any cogent reason. The cogent reasons to change the Assessed Value of your property include all the bases of changing the Assessed Value of your property provided by the Revenue & Taxation Code. Three common reasons to change the value of your property are new construction, inflation, and change in ownership.

Property Tax Liability	=	Assessed Value	X	Rate of Tax
­ ­ Change in ownership affects this Assessed Value to change your Property Tax Liability

In the simple equation shown above, the relationship between change in ownership and Assessed Value is the most important point and is the subject matter of this eBook. The effect of a change in ownership is such as it may create a wide gap between Assessed Values of two strikingly similar properties. The fact is explained in the coming paragraph and illustration.

Changes in ownership create disparities in Assessed Value and result in different tax liability for owners who own similar properties. They, despite owning similar properties, can have substantially different Assessed Values based solely on the dates the properties were purchased. These disparities result in locations and in counties wherever significant appreciation in property values has occurred over time. Longtime owners of property who’s Assessed Values generally may not be increased more than 2 percent per year, gets the benefits of holding the properties. They tend to have noticeably lower tax liability than that of recent purchasers of similar properties. The clear reason behind higher tax liability of recent purchases of the properties in that the Assessed Values of their properties tend to approximate market levels.

Illustration

Mr. Allan Anderson owns a house adjacent to that of Mrs. Wallis Watson, his neighbor. Both the houses are similar and the County Assessor has assessed them at $ 121,000 each for the year 2012-13. Mrs. Wallis Watson sold her house to Mrs. Sara Smith. What will be the difference between the Property Tax Liabilities of Mr. Allan Anderson and his old and new neighbor? The property owners in the county pay 1.0% tax on average and the current market price of the house sold is $351,000.

Property Tax before change in ownership

Mr. Allan Anderson’s house has Assessed Value $121,000. If you ignore any adjustment for inflation, you can calculate the Property Tax for year 2013-14 as under:

Property Tax Liability	=	Assessed Value	X	Rate of Tax
$1,210	=	$121,000	X	1.0%

Before transfer, Mrs. Wallis Watson’s house has Assessed Value $121,000. If you ignore any adjustment for inflation, you can calculate the Property Tax for year 2013-14 as under:

Property Tax Liability	=	Assessed Value	X	Rate of Tax
$1,210	=	$121,000	X	1.0%

Property Tax after change in ownership

Since, there is no change in ownership, Mr. Allan Anderson’s house has the same Assessed Value i.e. $121,000. If you ignore any adjustment for inflation, you can calculate the Property Tax for year 2013-14 as under:

Property Tax Liability	=	Assessed Value	X	Rate of Tax
$1,210	=	$121,000	X	1.0%

After transfer, Mrs. Sara Smith’s house has Assessed Value $351,000. If you ignore any adjustment for inflation, you can calculate the Property Tax for year 2013-14 as under:

Property Tax Liability	=	Assessed Value	X	Rate of Tax
$3,510	=	$351,000	X	1.0%

The Property Tax Liabilities of Mr. Allan Anderson and his neighbor Mrs. Wallis Watson is same i.e. $1,210. However, because of change in ownership Mrs. Sara Smith has to pay Property Tax more than the Property Tax to be paid by Mr. Allan Anderson. Mr. Allan Anderson will pay ONLY $1,210, but Mrs. Sara Smith will pay $3,510 just because of the change in ownership. A difference of $ 2300 in tax payable!

As mentioned above, there are a number of exclusions to reassessment during changes in ownership. These will be examined in detail in a future post.

California Property Tax: Change in ownership and Proposition 13

Property Tax in California 

If you own taxable property on January 1, you become an assessee and are liable to pay property tax. The property tax amount you have to pay is based on the value of your property, or more accurately on its assessed value. The assessed value of your property is the value determined by the County Assessor of your county for property tax purposes. It is shown on your property tax bill (see a typical property tax bill below). The assessed value of your property is likely to be the prior year’s assessed value adjusted for inflation by up to 2%. Hence, you normally do not expect a large increase in your property tax bill. You will receive a property tax bill with a normal increase in amount payable unless there is a change in ownership.

If there has been a change in ownership of your property, its assessed value no longer remains the prior year’s assessed value adjusted for inflation. Its new assessed value will be its market value after it has changed ownership. The date of change in ownership is also important to ascertain the effective year of change in assessed value. Since, your property tax is calculated on the assessed value of your property, the change in ownership and its effective date can have a major impact on your property tax bill.

This section will explain to you the two primary factors that affect your property tax bill, as well as how change in ownership can be another dominant factor that results into higher assessed values and property tax bills.

A property tax bill gives you important information including the name of the owner, assessed value of the property, and property tax rate.

Property Tax Bill

Two primary factors which increase your Property Tax Bill

Your Property Tax on real property depends on two primary factors:

1. The taxable value (assessed value) of your real property; and
2. The tax rate.

One of the other factors that affects your property tax liability is change in ownership. It is a dominant factor which increases your property tax by increasing the assessed value of your property. As the assessed value increases, it causes your property tax to increase as a result. 

When a change in ownership occurs, the County Assessor assigns a new assessed value to your property. The technical term for assigning a new taxable value to your property is reappraisal or reassessment. 

In California, reassessment based on change in ownership can very often account for major increases in property taxes each year. The reappraisal or reassessment of property due to change in ownership is one of the major driving forces behind higher property tax bills and increases in public revenue.

Let us examine how property taxes are calculated and how the changes in ownership increases the payable amount shown on a property tax bill. It is important to keep three items in focus throughout the coming text. The three factors are assessed value and increases in it; rate of property tax, and change in ownership.

You cannot calculate property tax without assigning a value to your property

You cannot calculate the annual property tax on your real property simply by punching the number of rooms, shops, apartments, and swimming pools into a calculator! You need to know the value that has been assigned to your specific property. Once you know this value, the process of calculating your property tax liability is simple and straightforward. You need to multiply the value by the tax rate to get the amount of property tax payable. That is:

Property tax = property value X tax rate

The value on which you calculate the property tax of your real property is the first primary factor that affects amount payable shown on your property tax bill. A county assessor will call it the assessed value (taxable value) of your property, i.e., the value on which your property tax liability is computed. The higher the value of your property, the higher will be your property tax bill. That is why owners of properties strive to keep the assessed value of their properties by adopting all possible legal measures.

The California Revenue and Taxation Code and Property Tax Rules spells out a precise procedure to determine this assessed value of your real property based on its size, location, improvements (houses, garages, fences, etc.), and other factors.

Note the underlying arithmetic:

The higher the assessed value of your property, the higher the tax liability on your real property will be.

The County Assessor may increase the assessed value of your property each year in order to adjust for inflation.

In summary, the assessed value of your property will be reappraised by the County Assessor based on any new construction, as well as change in ownership. It will also be adjusted for inflation in addition to any reappraisal.

You need a rate to calculate property tax on the value of your property.

The assessed value of your real property is not sufficient alone to determine your property tax liability. You also need a property tax rate to multiply by this value to determine property tax payable. The rate of property tax is the second primary factors which increases or decreases your property tax in a given year.

Arithmetic is simple:

The higher the rate of property tax rate in your county, the higher your tax liability will be.

A lower tax rate is good for saving property owners money and a higher tax rate is good for tax collectors.

The power to tax

This Article is about locally assessed real property. Locally assessed personal property and state-assessed properties are not subject of this Article/eBook.

The local government has power to tax real property. Primarily, the government exercises the power to tax by imposing tax at specified rates and subsequently changing the rate of tax annually or after a suitable period.

The government increases tax by increasing assessed value and rate of property tax

Because the amount of your property tax bill depends on the assessed value of your property, it changes as the assessed value of your property changes. In addition, if rate of tax changes, your property tax also changes. Therefore, in addition to other measures, the government can increase property tax amount on property by changing both the primary factors which determine your property tax.

The government can increase your property tax by:

1. Increasing the assessed value of property; and
2. Increasing the property tax rate.

Prior to 1978, annual assessments for real property were based on current fair market value. In addition, it was not possible for the County Assessors to annually assess property due to financial and human resource constraints. Therefore, they assessed property on a cyclical basis after every three to five years. Between these reappraisal cycles, county assessors would often apply interim value increases based on trending factors such as inflation.

If the County Assessor of your county uses the market value as the assessed value of your property, your property tax bill will increase or decrease with the changes in the market value of your property. In turn, the market value of your property changes based on the market forces that drive the real estate market. Therefore, the tax on your real property is subject to both market forces and the government. If real estate prices are soaring, property tax bills will also show higher payable amounts. Before 1978, the government was on the receiving side of these benefits because of ever-increasing real estate prices. However, the assessed value was no longer allowed to increase based on market values of property after 1978.

Prior to 1978, there were no prescribed limits on assessing initial assessed value at a base year values, increasing the assessed value from year to year, or increasing the rate of property tax. The passage of Proposition 13 in 1978 prescribed these limits and curtailed many of the methods of the government to tax real properties.

Proposition 13 has limited the government’s power to tax

In June 1978, California voters approved Proposition 13 to change property taxation in California. The passage of Proposition 13:

1. Limited the property tax rate applied to assessed values to 1 percent plus additional rates to retire bonded indebtedness;
2. Placed explicit limitations on the power of the government to impose additional property taxes; and
3. Limited increases in assessed values.

Proposition 13 limited the power of the government to assign values to properties by fixing base values for properties at market values of 1975 in general. After its passage in 1978, the assessment procedure of real properties for property tax has dramatically changed. Real property values for property tax purposes are now rolled back to their March 1, 1975, values before any increase in them and before calculating property tax on these values.

In addition to fixing the base values, Proposition 13 further limited the government’s power to tax by placing strict upper limits on annual increases in assessed values. The assessed value of a property cannot increase by more than 2% in any given year. This means both the initial assessment of a property and its yearly increase are now limited.

After Proposition 13, a County Assessor annually assesses all real property in California annually on January 1. Under the Revenue & Taxation Code, two values are compared, and the greater of the two is assigned as the assessed value for the property:

1. Base Year Value as of March 1, 1975 plus adjustment for inflation; and
2. Base Year Value as of the date of recent change in ownership.

Base Year Value as of the date of new construction is also relevant because new construction also triggers reassessment. However, reassessment based on new construction is beyond the scope of this article/eBook.

Thus, Base Year Value of March 1, 1975 plus adjustment will be the assessed value of your property unless there is new construction on your property, or the property is transferred through sale. Therefore, any new construction or transfer is likely to result in a higher assessed values for your property.

A base year value is the full cash value or fair market value of the property. The base year value is adjusted for inflation at a specified rate. Since Proposition 13 placed a limit on the annual increase in assessed value, the base year value cannot be increased by more than 2% in a year, unless the property is transferred or new construction takes place.

The law defines fair market value as the full cash value of real property or its equivalent. It is the amount of cash that the seller of the real property would expect to receive on the open market if neither party were under an exigency to enter into the transaction and both parties were fully informed about any advantages or disadvantage associated with the property.

After the passage of Proposition 13, the value of real property in California, for property tax purposes, does not necessarily increase to keep pace with its current fair market value. However, a change in ownership can result in the assessed value being increased to the current market value, regardless of its previous assessed value.