Header

Main Content

Saving Property Tax Basis

Home » Saving Property Tax Basis

October 03, 2020 Words by The CREM Group

Over the many years we have been in the probate real estate business, our CREM Group professionals have had a few clients who were surprised that having a property change ownership can trigger a reassessment of the family home for property tax purposes if not handled properly. The transfer of home between parent and child through a trust would not be considered a change in ownership—and the property taxes would not be affected—if a “Claim for Reassessment Exclusion” (form BOE-58-AH) was filed in a timely fashion. (More on that below.) Straightforward transfers are relatively easy.

 

On the other hand, there may be instances where a family residence is placed into a trust that leaves the family home to two heirs, usually 50% each. If the heirs sell the home, they get half the proceeds, but if one or the other wants to keep the house and buy the other sibling out, it triggers a “change-of-ownership” reassessment as the parent-to-child exemption is not valid. See our blog post on “When Beneficiaries Don’t Agree.”

 

But also, be aware that the property taxes will be increased for the sibling who keeps the whole property unless they know about a nice workaround that attorneys call the Non-Pro Rata Distribution (NPRD). This NPRD means each heir gets an equal part of the whole estate, but not necessarily of each separate asset. It’s taken some California state legislation to get to this point.

 

Legislation History

 

In 1978, California voters passed Proposition 13, the taxpayers’ line-in-the-sand on property tax increases. However, Prop 13 allowed the County Assessor to reassess property upon any “change of ownership.” In 1986, Proposition 58 provided that a home transfer between parent and child would not be considered an ownership change, provided that a Claim for Reassessment Exclusion application (noted above) is filed in a timely fashion. Still, a sibling-to-sibling transfer will not qualify for the exclusion.

 

Workaround

 

Suppose one sibling wants to pay the other(s) for their part of the residence left by mom and dad, and they use their own money. In that case, it’s a definite change in ownership as to that portion, as it is a non-exempt transfer between/among siblings, rather than a parent-to-child transfer. Whatever portion is purchased would be subject to a tax reassessment. We send readers to this handy website with lots of FAQs answered about the forms needed, the timelines, and details. Note: the forms (although designed by the state of California) are administered by the counties and will not be found on the state website. Rather, the forms can be found on the county website for the property, or from your county’s assessor’s office. The following workaround (which avoids the reassessment) has been approved by the California State Board of Equalization (BOE). It only works if the purchaser does not use their own money. Confused? Well, here’s how it works. The trustee who wants to buy the home borrows the money from a third-party lender (a bank, say). The loan is secured by the home, and then the lender distributes the entire residence to the buyer of the home encumbered by the loan amount and dispenses an equivalent value in cash to the other sibling heir. There would be no change in ownership and, thus, no reassessment. The owner of the home would be responsible for paying back the loan, of course.

 

Clarifying Examples

 

In each case, we assume 1) The home has a value of $1,000,000. 2) The trust allows a non-pro rata division of assets. 3) The trust permits the trustee to borrow money. 4) A Claim for Reassessment Exclusion has been filed. 5) There are only two siblings/beneficiaries.

 

Scenarios

 

Scenario #1: The only asset in the trust is the family residence. After the trust administration, the home is allocated by deed 50-50 to two sibling beneficiaries. RESULT: No change in ownership = no reassessment.

 

Scenario #2: The only asset in the trust is the family residence. The buying sibling raises their own $500,000 to buy out the interest from the other sibling. Ownership changes for 50% of the home, and the reassessment is made on that half, which increases the property tax bill. RESULT: Change of ownership on half = reassessment on half the home.

 

Scenario #3: The trust has in it $1,000,000 in cash and the home. If the siblings agree, one sibling takes the home, and the money goes to the other. RESULT: Same as in #1 -- No change in ownership = no reassessment.

 

Scenario #4: The only asset in the trust is the home. Sibling A borrows $500,000 from a third-party lender (TPL). The TPL distributes the home encumbered by the loan to the “buyer” sibling and pays the “seller” sibling the $500,000 in cash. The home has not changed ownership. RESULT: Same as in #1 -- No change in ownership = no reassessment.

 

Scenario #5: The trust comprises the family residence and $200,000 in cash, for a total trust estate of $1,200,000. The trustee borrows $400,000 from a third-party lender, and that lender distributes the family home (with the $400,000 loan against it to one sibling), and the other sibling gets $600,000 in cash. RESULT: Same as in #1 -- No change in ownership = no reassessment.

 

“Don’t try this at home.”

 

Work with experienced individuals

 

As always, we recommend that you surround yourself with people (like the CREM Group) who are knowledgeable about markets, homes, neighborhoods, lenders, and tax ramifications of any real estate transactions—whether probate, conservatorship, trust, or otherwise. We are not accountants, but we know many. People on our team can counsel you on these and any other “tricky” but legal means to save on taxes.

 

Here’s why: These transactions (and other real estate trust dealings) must be handled carefully. Be sure that a suitable lender is engaged who will provide adequate documentation furnished to the County Assessor. We recommend that an attorney familiar with trust administration work with you on probate matters. It’s worth it, though. Preserving your parents’ low property tax base can result in savings of thousands of dollars. It could mean the difference between keeping the family home and having to sell it!

 

As long time probate real estate agents and as attorneys working in and around all kinds of properties in Los Angeles and Orange Counties, the CREM Group has made sure we support our clients, so they know the alternatives to buying, selling, or renting probate, trust, and conservatorship homes and commercial properties in California. - - - - -

 

As always, contact us by email here if you have any questions about real estate, probate real estate, conservatorship, or trust real estate properties, especially in Los Angeles and Orange Counties in California.

 

Or directly: Mark Cianciulli, Esq. mark@cremgroupre.com Daniel Taylor, Esq. daniel@cremgroupre.com

 

DISCLAIMER: This content is meant purely for educational purposes. It contains only general information about real estate and legal matters. It is NOT legal advice and should not be treated as such. We recommend consulting a legal or tax professional before acting on any material, opinion, or perspective described herein. ***

 

COVID-19 Safety. As all of us at the CREM Group market and sell our inventory of probate, trust, and conservatorship homes for our clients, we adhere to the COVID-19 regulations set by the California Association of Realtors.

 

Testimonials

  • “Attorney’s themselves, The CREM team had the process dialed. After an unexpected family loss, we were in no condition to handle such a complicated transaction. From the very beginning, they laid out the process of the sale, their strategies to get it sold for the highest price and executed each phase just as discussed. Professionalism at it’s finest.

    Frankie C.

  • “Attorney’s themselves, The CREM team had the process dialed. After an unexpected family loss, we were in no condition to handle such a complicated transaction. From the very beginning, they laid out the process of the sale, their strategies to get it sold for the highest price and executed each phase just as discussed. Professionalism at it’s finest.

    Frankie C.

  • “Attorney’s themselves, The CREM team had the process dialed. After an unexpected family loss, we were in no condition to handle such a complicated transaction. From the very beginning, they laid out the process of the sale, their strategies to get it sold for the highest price and executed each phase just as discussed. Professionalism at it’s finest.

    Frankie C.

Property in Probate?

Get in touch with one of our probate specialist today.