Everything You Always Wanted to Know About
Transferring Real Estate Without Getting Reassessed
by Edgar Saenz, Esq.
Here’s the problem: In California, a change in ownership of real property triggers a reassessment. Here’s a menu of six ways to legally transfer property without incurring a reassessment.
(1) From Parent to Child
Under Prop 13’s parent-child exclusion, a transfer of a principal residence from parent to child is exempt from a property reassessment regardless of the value of the home. This is an unlimited exemption that potentially can be done more than once.
The exclusion also applies to other real properties (limited to $1,000,000 of assessed value) to children or trusts for the benefit of children. Note that each parent can transfer up to $1,000,000 of assessed value to children.
(2) From Child to Parent
The parent-child exclusion applies to transfers from children to parents as well as from parents to children.
(3) From Grandparent to Grandchild
A grandparent has $1 million-dollar exclusion in transfers to grandchildren. The grandchild’s parent who is the child of the grandparent must be deceased.
Example: Granny gives (or sells) Whiteacre to Grandchild Ginny. A transfer to Ginny qualifies for the grandparent/grandchild exclusion if Molly (Granny’s child and Ginny’s mother) is deceased. Whiteacre will be not reassessed.
The filing of the parent-child or grandparent-grandchild exclusion claim form is due within 3 years of death or before a subsequent transfer to a third party after death, whichever is earlier. Alternatively, the claim form is due within 6 months of the assessor mailing a supplemental assessment.
(4) To Entity in the Same Proportions
A property transfer to an entity escapes reassessment if it meets the proportional interest rule. There is no change of ownership if the transfer merely changes the title holding method and the proportional interest in the property remains the same before and after the transfer.
Example: If two brothers who own a duplex as 50/50 tenants in common transfer their interest into a partnership where each owns 50% of the capital and profits, the rule precludes a change in ownership.
(5) Up to 50% of Entity
You can transfer up to 50 percent of an entity without triggering reassessment of any part of the real property held by the entity. This rule applies to partnerships, LLCs, and corporations.
(6) From Property owner to QPRT
When a transferor transfers real property to an irrevocable trust, a change in ownership occurs unless the transferor is the sole present interest beneficiary of the trust, which is the case with a QPRT (a Qualified Personal Residence Trust).
Summary
Beware of the tax trap of transferring property and triggering reassessment. There are various exceptions to avoid this. With planning, many situations lend themselves to an applicable technique.
Edgar Saenz is a Los Angeles-based estate planning attorney. He is a graduate of Stanford Law School. He is a member of the Trust and Estates sections of the State Bar of California and the Los Angeles County Bar Association and serves on the board of the Culver Marina Bar Association. He lectures to attorneys and is judge pro tem. Telephone: (310) 753-1668; email contact: [email protected]