A change of ownership
In California, local tax assessors reassess a property’s fair current market value on each change of ownership — typically a sale. Unavoidably, reassessment at a higher value causes an increase in property taxes. [Calif. Revenue and Taxation Code §§63 et seq.]
A change in ownership that triggers reassessment establishes a new base year value equal to the property’s sales price (or fair market value (FMV), whichever is higher) at the time of transfer. However, Proposition 13 (Prop 13) automatically excludes many transfers from reassessment.
In addition to these automatic exclusions, a property or a portion of a property may also be eligible for exclusion with a properly filed claim. [Rev & T C §§63 et seq.]
Clients often consult their agents when seeking to add or remove persons from title in conveyances not part of a transaction the agent negotiated. The agent’s advice is based on their knowledge about conveyances or other transfers which change title and trigger reassessments as dictated by Prop. 13 legislation — and, subsequently, Proposition 19 (Prop 19).
By knowing which transactions are excluded from reassessment, an agent properly advises their client on the effect any change in ownership will have on their property taxes.
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Exclusion profusion
Transactions which do not trigger reassessment of any kind include:
- a transfer solely between a husband and wife [Rev & T C §63];
- a transfer between registered domestic partners [Rev & T C §62];
- a title update to properly reflecting the name(s) of the person(s) holding title to the property (e.g., a name change upon marriage) [Rev & T C §62];
- a change to title recorded only as a requirement for financing purposes or to create, terminate or reconvey a security interest (e.g., co-signer) [Rev & T C §62];
- the recording of a document to substitute a trustee of a trust, mortgage or other similar document [Rev & T C §62];
- a transfer that results in the creation of a joint tenancy in which the seller (transferor) remains as one of the joint tenants [Rev & T C §65];
- a transfer that returns the property to the person who created the joint tenancy (original transferor) [Rev & T C §65];
- a transfer between an individual and a legal entity (or between legal entities) that results solely in a change in the method of holding title (the proportional ownership interests of the transferors and transferees remain unchanged) [Rev & T C §62]; or
- a transfer of 50 percent or less of the voting stock or ownership interest in a legal entity holding real property. [Rev & T C §64]
With the passage of Prop 19, some changes of ownership previously excluded from reassessment entirely are now treated differently.
For these transactions, the property’s base year value is reassessed at the property’s FMV on the transfer of title, but $1,000,000 is excluded from the taxable value of the property.
Changes of ownership that fall under the Prop 19 $1,000,000 exclusion include:
- a transfer between parent(s) and child(ren) [Rev & T C §63];
- a transfer from grandparent(s) to grandchild(ren) where the parents of the grandchild(ren) are deceased [Rev & T C §63.1(a)(3)];
- the replacement of a principal residence by a person of 55 years of age or older [Rev & T C §69.5]; or
- the replacement of a principal residence by a person who is severely disabled. [Rev & T C §69.5]
A sibling rivalry
A common misconception among property owners is that any transfer between immediate family members is excluded from reassessment. This is not the case.
Consider two siblings who co-own a property they purchased together. Several years later, one of the siblings decides to relinquish their ownership interest to the other. The property’s market value has increased significantly since they purchased the property. Does the transfer trigger reassessment?
Yes! The transfer triggers reassessment of 50 percent of the property to current market value. Thus, half of the property assessment remains at its prior base year value while the other half is assessed at the new base year value.
Unless the transaction qualifies for exclusion under Prop 13 or Prop 19, transfers between siblings — or anyone else — trigger reassessment.
Related article:
This article was originally posted April 2017, and has been updated.
