Example: John and Mary each hold a 50% stake in California real estate. To protect the assets, John and Mary each transferred their 50% stake to Acme LLC. John owns 50% of the shares of Acme LLC and Mary owns the remaining 50% of the shares. Since the 50% interest in the LLC is equal to the 50% interest that John and Mary each held in the property, the transfer is exempt from revaluation. Example: John bought a property for $100,000 30 years ago. The property has earned 8% per year and is now worth $1,006,265.69. However, the assessed value is limited to an annual increase of 2%. Therefore, the estimated value is only $181,136.16. This means that John is only taxed on the estimated value of $181,136.16, not on the fair market value of $1,006,265.69. The second major update will benefit landowners and will take effect on April 1, 2021. In general, this change provides that people over the age of 55, people with disabilities, or victims of a wildfire or natural disaster can transfer the estimated value of their principal residence in California to a newly acquired or newly built replacement principal residence in any California county. Brief Background: Under Proposal 13, the estimated value of real property for the purpose of calculating property taxes was restored to the March 1, 1975 value (“base year value”), which was increased annually by an inflation factor and did not exceed 2% per year. The completion of a new building or a change of ownership (“IPR”) triggers a revaluation to a new base year value equal to the current market value, which means higher property taxes.
An IPR is a transfer of a current economic interest in real estate if the interest to be transferred is equal to the value of the commission interest. The key to avoiding property tax increases is either to avoid an IPR or to qualify for an “exclusion” under the Tax Code (the “Code”). This article focuses on using the most common exclusions from the Code to avoid property tax increases. The parent-child exemption applies to both direct transfers and transfers of current beneficial ownership of California real estate for life or will. This allows parents to create trusts for the benefit of their children who are eligible for parent-child exclusion. A well-structured trust can leave assets in favour of the children of the creator of the trust without the property being revalued for tax purposes. Any transfer between a natural person and a legal person (or between legal persons) that results only in a change in ownership (the proportional ownership rights of assignors and purchasers remain unchanged) is excluded from revaluation under Proposal 13. No application form is required. However, additional documents may be required.
(Ref. R&T code § 62 (a) (2)) According to Proposition 13, the property tax rate is set at 1% of the estimated value plus an assessment obligation approved by referendum. Due to various assessment obligations, Sacramento County property tax rates average about 1.1% throughout the county. Like California`s municipal land laws, California`s tax and tax law treats a married couple as a single economic entity. As long as the owners were married at the time of the transfer, a transfer from one spouse to another does not entail a revaluation. If none of this happens, the estimated value of a property should not increase by more than 2% per year. The 2% cap benefits homeowners by allowing them to pay taxes on an estimated value below the market value of the property. But the protection offered by the ceiling is lost when there is a change of ownership.
Section 60 of the California Revenue and Tax Code defines change of ownership as follows: Most revocable living trusts become irrevocable after the death of the creator of the trust. This can lead to particular problems under California law. If the trust becomes irrevocable – or if the trust is irrevocable from the outset – the transfer constitutes a change of ownership and is subject to tax if it is not well structured. To avoid this result, the relationship of trust may be structured to qualify for the parent-child exception (see above) or another exception to the reassessment. However, only the part of the property that changes ownership is subject to revaluation. For example, if 50% of the property is transferred, the appraiser will only reassess 50% of the property at its current market value at the time of the transfer, subtracting 50% of the existing reference year value from Proposition 13. In most cases, when a person buys a home, the entire property undergoes a change of ownership and 100% of the property is revalued to its current market value. Section 480 of the Revenue Code requires the purchaser of properties subject to local property tax and that have changed ownership to submit a change of ownership report in accordance with the following schedule: Property tax planning is a complex area of law. Without a full understanding of the issues, one could easily trigger a real estate revaluation that could have been avoided with proper planning.
Annual tax accounts may also include other items such as special dues, special taxes, direct levies, failing county utility bills, weed and hazard mitigation fees, and Mello-Roos bonds. These elements are commonly referred to as “direct costs”. None of these elements are defined as property taxes under the law because they are not based on the estimated value of the property. While tax office revenues are collected through the county`s property tax bills, the county itself has no control over these levies or the agencies that issue them. Disputes relating to the amount of levies other than property tax must be settled with the body collecting the levy and not with the assessor. .