Property Tax Reassessment

This holiday season recalls cheesy holiday movies. Scenes are set with children visiting the family home – possibly for the last time. One of them wishes they could keep the home with all the memories and moments it brings to mind. They all bemoan the tax man who makes it impossible to keep that family home in the family. But is it? There’s usually only one major consideration for a child considering keeping the family home – can I afford it? Sometimes people think, “The family home is worth so much more than my current home, I don’t think I could afford it.” But frequently people forget the ability to keep their parents’ property tax basis under very specific conditions.

Let’s look at the math to see the impact. Let’s say you bought your home 40 years ago. It’s now worth $1 million, but you bought it for $150,000. Each year, the County Assessor’s office can increase the value of the home for tax purposes by no more than 2% (what many refer to as the Prop 13 tax basis). So at the most

If your child bought a $1 million home today, they’d be paying close to $12,000 a year in property taxes – that’s an $8,000/year difference which turns into a monthly savings of $667.

That unaffordable home suddenly becomes a lot less expensive. In fact, if your child paid $500,000 for their current home, their property taxes on your home would be less than what they are paying now.

So, how do you set yourself and your children up to take advantage of this?

The general rule is that property is reassessed for property tax purposes when it undergoes a change in ownership. However, certain transfers are excluded from reassessment even though they would otherwise constitute changes in ownership. When the transfer is between a parent and child (or if the parents are deceased, a grandparent and grandchild relationship may qualify), the parent-child exclusion may apply. The parent-child exclusion can at least partially shield a transfer from reassessment if all the following apply:

• The transfer is between parents and children;
• The property transferred is either the principal residence or family farm of the transferor; The property transferred is or becomes the principal residence or family farm of the transferee within one year of the transfer; and
• The proper reassessment exclusion paperwork is filed with the county assessor.

Keep in mind, the home must continue to be lived in as the child’s primary residence in order to continue to keep the parents’ low tax basis. And there are many other wrinkles (such as setting up the transfer so it does not include anything that looks like the child buying their sibling(s) out).

Given these wrinkles, it is important to consult with professionals if this is something you want your estate plan to include. Call us today if you need help!