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.