How to Avoid Property Tax Reassessment
This article explains four ways of avoiding property tax reassessments that every homeowner in California should know. The property tax rate imposed on California homeowners is equal to 1% to 1.25% of the property's assessed value at the time of purchase. The assessed value is equal to the current market value of the property as of the date there is a change in ownership, plus a yearly increase in value based on inflation. Proposition 13 mandates that the yearly increase does not exceed 2% of the previous year's value. However, keep in mind that assessed value may also increase upon completion of new construction and that is why building permits trigger the tax assessor's interest. The key to avoiding property tax increases is to avoid a change in ownership. But, if you have to transfer ownership or sell the property, then make sure your transfer or sale qualify for one of the following exclusions. Or, if you are inheriting a home from your parent, you want to make sure you take full advantage of certain exclusions to retain your parent's low property tax basis. We will examine four very important exclusions: Propositions 58, 193, 60 and 90. These exclusions, if utilized properly, will save thousands of dollars in property tax bills annually.
Proposition 58 - Transfer between Parent and Child
It is common that a deceased parent may have bought a home 30 years ago for $100,000 then, 30 years later, when the parent dies the child receives a $1,000,000 home. Does the child pay the property tax based on the original $100,000 assessment or on the current value of $1,000,000? Proposition 58 allows the child to retain the old property tax basis of $100,000! This is of huge importance because it represents thousands of dollars in savings in property taxes each year. The following are the important requirements of Proposition 58:
- The person doing the transfer, who can only be the parent or the child, must own the home. Either the parent owns the home and is giving it to the child or the child owns the home and is giving it to the parent.
- Proposition 58 only applies to a transfer between parent and child.
- The person receiving the home must be the parent or the child. Under Proposition 58, a "child" may be a son, daughter, son-in-law, daughter-in-law, stepchild, or child adopted before the age of 18.
- The exclusion is not automatic. You must complete a "Claim for Reassessment Exclusion for Transfer between Parent to Child" form within 3 years of the transfer.
- There is no dollar limitation on the original owner's principal residence. The parent's home could be worth 5 million dollars at the date of transfer, but if the parent bought the home for $100,000 then the child's property tax basis is going to be $100,000.
- There is a $1 million base-year cumulative value limit on the transfer of non-principal residences. Multiple non-principal properties may be transferred without property tax reassessment only up to this limit.
Proposition 193 - Transfer between Grandparent and Grandchild
- A home that is transferred from grandparent to their grandchild may be excluded from reassessment.
- The parent of the grandchild MUST be deceased as of the date of the transfer.
- There is no dollar limitation if the home that is being transferred is the grandparent's principal residence.
- The exclusion is not automatic. You must complete a "Claim for Reassessment Exclusion for Transfer between Grandparent to Grandchild" form.
Propositions 60 & 90 - Relocation of Homeowners Age 55 (or older)
Proposition 60 allows homeowners who are 55 years of age or older to sell their primary residence but yet retain their old property tax basis if they purchase a replacement residence within two years in the same county. Proposition 90 extends this by allowing the inter-county transfer of the property tax base.
Homeowners should be aware of the above rules when it comes to property taxes because it could literally mean saving thousands of dollars annually. The benefits granted under these propositions can only be obtained if and when the proper legal forms are completed and filed following transfer of the property(s). There are time limits and deadlines that apply
Information provided by the Law Offices of Paul Horn.