Property tax assessments for Californian homeowners have been limited by Proposition 13 since 1978 (commonly referred to as “Prop. 13”). Since it has been 40 years since Prop. 13 was passed, many Californian homeowners are not familiar with it. This blog entry will provide you with some background on Prop. 13 plus explain how to avoid having the value of your home reassessed (and prevent the likely increase in property taxes) when you change the title of your home.
The County Assessor of the county where any given piece of real estate is located values the property and taxes the owner of the real estate a property tax based on that value. Prior to Prop. 13, as the values of real estate fluctuated, the owner's property tax also fluctuated annually. Plus, there was no cap on the increase in the property taxes. The general upwards trend of higher home values in the pre-1978 housing market would frequently result in an expensive annual increase in property taxes for many Californians. Eventually, that became unbearable for many Californian's, so Prop. 13 passed.
Prop. 13 sets the tax rate on a home at 1% of the value of the property when it is purchased (or otherwise changes ownership). As long as there isn't a “change of ownership,” per Prop. 13, the county assessor's office may not increase the property tax by more than 2% each year, regardless of the value of your property or other fluctuations in the real estate market. As a result, homeowners who remain in the same property for many years will have a much lower property tax bill than their neighbors who just purchased their home.
A typical reassessment occurs when a homeowner sells their property. When the new grant deed is recorded, the County Assessor is informed and then will reassess the value of the property due to the change in ownership (in this case, from seller to buyer). The reassessed value will determine the amount of the new property tax for the new homeowner.
Ways to Avoid Reassessments
There are times when a homeowner might want to change ownership on their property, outside of selling the property. The key to avoiding a likely increase in property taxes is to avoid a reassessment on the value of your property. While the basic rule states that a reassessment occurs with a change in ownership, there are various exceptions/exclusion to this rule. As an estate planning lawyer, the exclusion that I see most often is the transfer of a property into a revocable trust. The “change of ownership” occurs when the homeowners record a new grant deed to transfer the title of their property into the name of their revocable living trust.
When any new grant deed is recorded, a Preliminary Change in Ownership Form must also be filed. This form, filed with the County Recorder's Office, is sent to the Assessor's Office, informing them of the potential change in ownership. However, as long as the homeowners have properly filled out the form, their transfer of the title from themselves to their revocable living trust will be excluded from reassessment and their property bill remain the same.
Other transfers that fall under the exclusion from the change in ownership exception include transfers between spouses; transfers to replace a principal residence owned by a person age 55 and over; transfers after the death of a co-tenant; and transfers between parents and children. These are only a few of the several different transactions that qualify for an exclusion.
Adult children whose parents will be giving them their real estate benefit greatly from the transfer between parent and child exclusion. The exclusion can work both ways, but it is more common for parents to give their children a property than the reverse. The recipients who are fortunate enough be gifted a property also get to avoid what can often be a very large increase in property taxes. For example, if mom and dad bought a house valued at $200,000 in the 1990s, their property tax bill would initially have been $2,000. Then with the 2% annual cap on increases, the amount of the tax bill would still be relatively low in comparison to a new tax bill based on the reassessment of the current home value.
Fortunately, preventing the reassessment for your children does not need to be done during your lifetime. It can, and generally should, be a part of your estate planning. As I have written about before, if you plan to remain in your home, transferring title to your children during your lifetime is ill-advised. I discussed the various reasons why in that blog post.
If you have questions about a transaction involving the potential or an actual change of ownership of your real estate, feel free to reach out to me. While this is not a highly complex area of law, mistakes can be expensive and a big headache. So, let's start a conversation. I invite you to fill out the form on the left side of this webpage or you can call at the number above.