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.