CALIFORNIA REAL PROPERTY TAX PLANNING AND APPEALS
At a 2012 seminar on California property taxation, the presenter stated, "As to reassessments, the change in ownership rules are what they are, and not much you can do about it. Nothing you can really plan around." What?! Nothing is further from the truth!
Californians know that under Proposition 13, the older a property's base year is (that is, either 1975 or a more recent reassessment date), the greater the property tax cost if a new reassessment is triggered. Even worse, that tax cost is not a one-time hit as it is for sales, income and estate taxes; it is an annual tax cost that you pay year after year after year.
What Happens with a Reassessment? Assume your property had a market value in 1975 of $100,000, and suppose you have never had a new reassessment since Proposition 13 was adopted (so it has a 1975 base year). With the yearly inflation amounts (capped at 2% per year), the 1975 market value of $100,000 would have an assessed value of $201,081 in 2013. While the property tax amount is only 1%, generally there are other assessment charges so using an average number of 1.25%, your tax payment would be $2,514 for 2013. Now if a reassessment is triggered in 2013, and if we assume the market value in 2013 is now $5 million, the assessed value leaps up from $201,081 to $5,000,000 and the tax cost leaps from $2,514 to $62,500.
So How Do You Structure Transactions to Save a Property Tax Reassessment? There are an enormous number of ways.
- Be Careful How You Take Title. When purchasing new property, how you take title will determine upon what event (and therefore how soon) you will have a future reassessment. So it makes a good deal of difference whether you take title as tenants in common, joint tenants, community property, in a revocable trust, in an irrevocable trust, in the name of a partnership or LLC or corporation, or in an individual name followed by later capital contribution to a partnership or LLC or corporation. How you take title at the time of purchase may set you up for a future reassessment which otherwise could have been avoided if a different form of vesting title had been used instead.
- Think Beyond the Parent/Child Exclusion for Family Transfers. If in the future you want to transfer substantial non-residential property to your children, are you limited to only $1 million in assessed value? The parent/child exclusion from reassessment for other-than-principal residences is limited to $1 million of assessed (not market) value. So right away you want to plan to maximize the amount of market value you can squeeze through based on the $1 million limit of assessed value. But even when you have reached the $1 million assessed value limit, are you out of options? No! In many situations - such as with ownership in legal entities, as joint tenants, or with a long-term lease - there can be legitimate ways to enable property to pass to the next generation without reassessment and without use of the parent/child exclusion. The parent/child exclusion is wonderful for family residences and smaller properties, but for multiple properties or large commercial properties, other strategies should be examined.
- Carefully Plan Your Trust Documents to Avoid Future Reassessments. The property tax "owners" of property held in a trust are the trust beneficiaries, and so the change in ownership rules are based on when the beneficiaries change. Future reassessments (e.g., upon a death of a settlor or a trust beneficiary) can be avoided by property tax provisions in the trust document which gives the trustee (or independent person) some discretion to restrict beneficial interests if it will save a reassessment; or by carefully planning which family members will be beneficiaries and receive the interest from which settlor/transfer; or by inclusion of general or special (limited) powers of appointment; or by powers of withdrawal or substitution of assets. You can also use a well-written trust to avoid a change in ownership or control of a legal entity that owns California real property.
- In Estates, Post-Mortem Planning Can Avoid Reassessments. Sometimes a disclaimer as to just a discretionary income interest can avoid a reassessment due to "sprinkle powers" in a trust. Sometimes making a no-pro rata trust distribution or sub-trust allocation will avoid a reassessment. Sometimes a property tax review of the history of a legal entity upon a death may turn up a previously missed reassessment that has a relatively small net tax cost but when reported will both avoid the reassessment upon the death and prevent other future reassessments.
- Do Not Transfer Any Interest in a Legal Entity Without Knowing the Property Tax Consequences. The rules for what triggers a reassessment of real property owned by a legal entity (partnership, LLC, corporation) are based on transfers of ownership interests in the legal entity itself (e.g., a transfer of a partnership interest, a transfer of a membership interest in an LLC, a transfer of voting stock). There is no "safe" percentage interest which can be transferred and not risk triggering a reassessment! A 0.01% transfer could trigger a reassessment in the right situation!
From this sampling you can see that many times there can be multiple ways to do a transfer, write a trust or hold title to real property. Property tax planning is a matter of viewing the available options and selecting the best strategy to minimize property taxes (both now and for the future) in such a way to coordinate with your other goals and objectives.
Working with the Assessor. It often pays to work informally with an assessor. Through cooperative communications we have obtained retroactive reassessment reversals and refunds of taxes paid which technically would not be available upon appeal. In one situation we had a reassessment reversed 18 years after the taxpayer had lost on appeal, and we got the prior base year restored and refunds issued, all through communications with the assessor without appeal, without litigation. When a reassessment is based on a change in ownership, whether or not a particular transfer or event actually constitutes a change in ownership is a legal question for which there is no statute of limitations, and therefore it can be reversed at any time. And even if an appeal is filed, it will save the legal costs if the issue can be informally resolved without having to go to an assessment appeals board hearing.
Appeals. When an appeal is required, first of all you want to make sure you don't miss the filing deadline so that you protect your legal rights. Different deadlines apply for different appeals, so you need to know the correct deadline. But also know that even if one deadline is missed, there may still be additional time for you to appeal, even if you can only get prospective relief because the initial deadline for retroactive relief has been missed. Secondly, you want to be sure the application (appeal form) is properly completed to present the specific issues you have in dispute with the assessor. Also, should you later decide to take your case beyond the assessment appeals board into the courts, it is wise to have a complete layout of the correct facts and your legal arguments attached to the appeal right from the start so that the courts will have the accurate record of your presentation to the assessment appeals board when they review the board's decision in the future.
Working with Other Legal and Accounting Advisors. Property tax strategic planning to avoid a reassessment, or handling appeals, is a specialty beyond the scope of most professionals. We often assist not only our own clients, but also other professionals for their clients. It may be for planning strategies and implementation, review of proposed transactions or documents for property tax issues, helping to reverse inadvertent reassessments, presenting arguments to an assessor or the State Board of Equalization or seeking an opinion letter, handling assessment appeals, or assistance with litigation at trial and appellate levels.