SAVE TAXES ON PROPERTY TRANSFERS
CAN YOU TRANSFER YOUR PROPERTY TO ANOTHER WITHOUT THE PROPERTY TAXES BEING RAISED?
On June 6, 1978, the state of California voters approved a proposition known as proposition 13. This was created to stop the rapid rise in property taxes on California Real Property. The basic idea was to reduce property taxes, which at that time were averaging about 3% of market value, to 1% of market value. The idea was that only when property transferred to another person or entity would the property be reassessed for property taxes. Upon transfer, property taxes would then be raised to 1 % of the new reassessed amount. Although there are bonds and other assessments that can be added to the taxes, the new taxes would basically remain the same until the property was transferred again. There are some other rules on cost of living type increases etc., but overall, this was the purpose for the Jarvis-Gann initiative.
Proposition 13 was named the “People's Initiative to Limit Property Taxation”, and it was actually an amendment of the Constitution of California enacted during 1978, through the initiative process. It is interesting to note that it was even declared constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is now known as Article XIII A of the Constitution of the State of California.
What is most remembered about Proposition 13 is the first paragraph, which limited the tax rate for real estate, which reads as follows:
“Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.”
It turned out that Proposition 13 decreased property taxes by assessing property values at their 1975 value and restricted annual increases of assessed value of real property to an inflation factor, not to be more than 2% per year. It also does not allow reassessment of real property each year, as was allowed prior to the passing of the amendment to the constitution, unless there was either change in ownership, or the completion of new construction.
It turned out that upon passage of Proposition 13, property tax rates on homes, businesses and farms was reduced by about 57%.
It seems that there are several reasons given why Proposition 13 was enacted in the first place. There was a concern that seniors in Californians with fixed incomes should not lose their houses because of high property tax costs. It was stated by some that because of high inflation during the 1970s, reassessments of residential property increased property taxes so much, that some retired people could no longer afford to remain in homes which they may have purchased long before.
It seems that many Californians were also perturbed by the spending that the state of California's government which had increased during 70s. It was a popular notion that Californians wanted a way to curtail continued government overspending.
Howard Jarvis and Paul Gann were the two advocates who were associated with pushing Proposition 13 through, thus, Proposition 13 became known as "Jarvis-Gann Amendment," Once again, under Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This "assessed value" may be increased only by a maximum of 2% per year, until and unless the property has a change of ownership. At the time of the change in ownership the low assessed value may be reassessed to complete current market value that will produce a new base year value for the property, which would require a 1% tax. However, just as before, any future assessments are likewise restricted to the 2% annual maximum increase of the new base year value. Although the 1% rule is the general rule, the property may be reassessed under certain conditions other than a change of ownership, such as when additions are made to a home, or if there is new construction.
The property taxes may also come down if the market value of the property goes down below its assessed value as it did in 2008 – 2011. Although these reductions were not a part of Proposition 13, they came into play once Proposition 8 was passed in 1978, which amended Proposition 13. There were Property Tax reductions during 2009 and 2010 under these new amended rules.
With that background, we come back to our original question: Can you save taxes, by keeping the Property Taxes from going up, even if the property is transferred out of your name. The Proposition itself would seem to say NO. However, in 1986 an amendment to Proposition 13 was approved which allowed for transfers between Parents and Children (either direction) were not to be seen as a transfer for reappraisal purposes. And this change was augmented by an addition called Proposition 193 which expanded this “no transfer” status to distributions between Grandparents and Grandchildren, as long as the parents of the Grandchild were already deceased. Proposition 58 allows for the transfer of a home, no matter the value, and real property other than a home, in value up to One Million Dollars. This exclusion for a raise in taxes is for real property and not business or other legal entities, and must be applied for in a timely manner. It is not automatic.
PROPOSITION 58, PARENT TO CHILD TRANSFER RULES
In the State of California, as discussed, under Proposition 13, real property is reassessed at market value if it is sold or transferred. The change in property taxes could increase dramatically. I had a client who inherited a piece of ground with an old house on it. They lived in the home for several years until one day they bulldozed the house and build a nice new home on the property. It was beautiful, spacious and just what they had always wanted. Prior to the reconstruction, the property taxes had been $488 per year. They were shocked when the first year after construction they received a Property tax bill for over $10,000. The transfer of the house to the kids from the parents after the parents died did not cause the kids to lose the Proposition 13 benefits. Their taxes continued to be $488 or so. It was the reconstruction that caused the shocking increase in the taxes.
Another client of mine had a trust from a father which gave a $2,000,000 ocean side property to the grandchildren, bypassing the grandchildren’s mother, who was still living. After the grandfather died, we knew that by giving the property directly to the grandchildren, the house would be reassessed. We tried to see if the county would allow us to first give the home to the mother and have her transfer it to the grand kids so that there would be no change in Property Taxes, but the county would not hear of that. Thus, the property taxes went up so high that the property that had been in the family for years had to be sold to pay the taxes. If the drafting attorney had thought about the tax consequences, he could have saved the property, kept the taxes low and blessed the family.
Proposition 58 allows the new property owners to avoid property tax increases when acquiring property from their parents or children. The new owner's taxes are calculated on the currently established Proposition 13 value instead of the current market value when the property is acquired.
Proposition 58 is also a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property between parents and children. Proposition 58 is now known as Section 63.1 of the Revenue and Taxation Code. This rule does not work for transfers between Third Parties or Siblings.
If you are expecting to make transfers of real property to another person, if you do it right, many times the receiver of the property can have it with the same low Property Tax as you have before the transfer. But it must be done correctly or your gift may end up being a burden instead of a benefit. A transfer of Real Property in the incorrect way could result in increased Property Taxes, Gift Taxes, or Capital Gains Tax. Do it right and many time you can eliminate all of these.
Contact me for a free consultation before transferring any real property, because once the transfer is done, it is too late to change. Let us help you keep what is yours!