This article addresses the issue of the broker’s assistance in a transaction designed to avoid notifying the assessor of a change of ownership.
Hiding transactions from the assessor
At times, buyers will confront their real estate broker or agent with a request to structure a transaction so its documentation will not be recorded on closing. These negotiations are not aimed at the seller. They are directed to the broker or agent working with the buyer.
In a weakening sellers’ market, buyers become more aggressive and inquiries into a broker’s assistance in “masking a transaction” in order to avoid the adverse financial consequences of a change of ownership are likely to arise. Buyers have many motives for taking ownership and possession of real estate while either leaving the transaction unrecorded or documenting the purchase as an unrecorded lease-option or land sales contract.
These motives may have legitimate business and legal purposes, but when the buyer’s failure to record a purchase transaction is an intentional effort to hide the change of ownership from the tax assessor or the existing lender, the buyer has violated the law.
If the change in ownership is hidden, unrecorded or masked by a deceptive recording, the county assessor has no way of knowing the property is to be reassessed. Thus, the buyer will retain the seller’s assessed value and property tax, which is based on market values from an earlier time when the seller acquired the property, typically an amount far below the price the buyer is paying for the property at the current fair market value.
Thus, the buyer’s goal is obvious: to avoid paying higher property taxes based on the reassessed value of the property when the buyer acquires ownership.
Brokerage concerns
Unless the agent in an unrecorded transaction has informed the buyer of the consequences arising from a hidden transfer, the agent will most likely be held responsible for all losses later suffered by the buyer, without concern for whether the agent had actual knowledge of the tax consequences of the sale.
The buyer is probably unaware of the penalties imposed on a buyer who fails to report a change in ownership to the assessor. When the transfer is discovered and the property is reassessed, the buyer will be subjected to a lien for all retroactively assessed taxes that have accumulated since the change of ownership (the transfer of ownership date).
Further, a one-time penalty of 25% on the evaded portion of the property taxes will be imposed, plus interest at the monthly rate of ¾ of 1% from the delinquency date of each evaded installment. [Calif. Revenue and Taxation Code §§504, 506]
A change-of-ownership statement must be filed with the county assessor within 45 days after any sale. While this filing is voluntary on the buyer’s part, the buyer will be penalized if the 45 days run without filing the statement and the assessor discovers a change of ownership has taken place. [Rev & T C §480(c)]
When an assessor finds out a previously unrecorded transfer has taken place, the assessor will make a request on the buyer involved to fill out and return a change-of-ownership statement.
If a buyer fails to file the statement when the assessor requests it, the buyer will be further penalized $100 or 10% of the current year’s taxes, whichever is the greater amount, but not to exceed $2,500 if the buyer did not intentionally fail to respond. [Rev & T C §§480(c); 482(a)]
Mischief leads to misconduct
One deception — the masked transfer — usually leads to others, many of which are not clearly foreseeable.
For example, an agent who assists in a transaction knowing that one of its purposes is to avoid triggering a Proposition 13 reassessment, also violates the law since his conduct aids and abets the buyer in violating the law.
Licensed agents are prohibited from conduct that constitutes “fraud or dishonest display.” [Calif. Business and Professions Code §10177(j)]
An agent’s involvement in a transaction that masks a change of ownership is grounds for disciplinary action by the Department of Real Estate (DRE).
Should the client or others file a complaint with the DRE, the agent will face disciplinary action.
