Property Tax Pitfalls When Transferring Real Property to Family Members

High property values in California highlight the need for careful property tax planning. If you have owned your property for many years, it is likely that your property’s assessed value for property tax purposes is significantly lower than today’s fair market value. If your property should be reassessed, you or your family members could be faced with a significant increase in the annual property tax.

Fortunately, California law allows for some transfers of real property to be excluded from property tax reassessment. Unfortunately, the property tax laws are technical and complex, so it is not uncommon for property o\Ã/ners to unintentionally trigger a reassessment that could have been avoided. In this article, I will provide you with a summary of some of the most common mistakes.

Parent to Child Transfers

The law excludes from reassessment a limited number of real property transfers between parents and their children. When a parent has real property in their estate that is transferred to their children through a trust, will, or intestate succession, it is often desirable to distribute a property entirely to one of the children instead of to multiple children who would take title to the property jointly. Such a transfer must satisfy several requirements in order to qualify for the parent to child exclusion from reassessment. Often, one sibling wishes to buy out the interests of the other siblings in order to take full ownership of the property. It is easy to make the mistake of thinking that this transfer will not cause property tax reassessment because the origin of the property is the parents’ estate. The county assessor will likely view the transaction as a sibling-to-sibling transfer and not as a transfer from the parent. Any real property transfers between siblings will cause reassessment. If you are a parent who intends to leave your real estate to your children, or if you are a child who will inherit real estate from a parent’s estate, it is crucial to seek professional advice BEFORE any transfers of real property are made.

Transfers of Legal Entity Interests

Legal entities such as Corporations, LLCs, and Partnerships that own real property are subject to a distinct set of property tax rules. Interests in legal entities may be transferred without reassessment until a certain threshold is met. Business owners who transfer entity interests to their children or others may inadvertently cause property tax reassessment through a change in control or change in ownership.

Transfers of legal entity interests do not qualify for the parent to child exclusion from reassessment, but a careful transfer plan can minimize the property tax consequences.

Transfer of Base Year Value

If you are over the age of 55 or disabled, you may be able to transfer your home’s current base year value to the purchase of a different home, thereby keeping your property tax payments low. To qualify, you must acquire your new home LÙO% through a sale transaction. If you acquire any portion of the new property by gift or inheritance, you will not be able to transfer your base year value.

Property tax mistakes are easy to make and can be very costly. It is important to seek professional advice for every sale, gift, purchase, or bequest of real property or of a business entity that holds real property.