Over the many years we have been in the probate real estate business, The CREM Group professionals have had a few clients who were surprised that having a property change ownership can trigger a reassessment of the family home for property tax purposes if handled incorrectly.
Transfer that Doesn’t Affect Property Taxes
The transfer of home between parent and child through a trust in California would not be considered a change in ownership—and the property taxes would not be affected—if a “Claim for Reassessment Exclusion” (Form BOE-58-AH) was filed in a timely fashion. (More on that below.) Straightforward transfers are relatively easy.
Transfer that Triggers Property Tax Reassessment
On the other hand, there may be instances where a family residence is placed into a trust that leaves the family home to the heirs, usually 50% each if two heirs, 33% if three, and 25% if four, etc. If the heirs sell the home, they get a portion of the proceeds according to the percentage in the trust. Still, if one or the other wants to keep the house and buy the other sibling(s) out, it triggers a “change-of-ownership” reassessment as the parent-to-child exemption is not valid. Brothers and sisters often don’t agree!
But also, be aware that the property taxes will be increased for the sibling who keeps the whole property unless they know about a nice workaround that attorneys call the Non-Pro Rata Distribution (NPRD). This NPRD means each heir gets an equal part of the whole estate, but not necessarily of each separate asset. It’s taken some California state legislation to get to this point.
Legislation History
In 1978, California voters passed Proposition 13, the taxpayers’ line-in-the-sand on property tax increases. However, Prop 13 allowed the County Assessor to reassess property upon any “change of ownership.” In 1986, Proposition 58 provided that a home transfer between parent and child would not be considered an ownership change, provided that a Claim for Reassessment Exclusion application (noted above) is filed in a timely fashion. Still, a sibling-to-sibling transfer will not qualify for the exclusion.
Workaround
Overview: Suppose one sibling wants to pay the other(s) for their part of the residence left by mom and dad, and they use their own money. In that case, it’s a definite change in ownership as to that portion, as it is a non-exempt transfer between/among siblings rather than a parent-to-child transfer. Whatever portion is purchased would be subject to a tax reassessment.
We send readers to this handy website with lots of FAQs answered about the forms needed, the timelines, and details. Note: the forms (although designed by the state of California) are administered by the counties and will not be found on the state website. Rather, the forms can be found on the county website for the property or from your county’s assessor’s office.
Workaround: The following workaround (which avoids the reassessment) has been approved by the California State Board of Equalization (BOE). It only works if the purchaser does not use their own money. Confused? Well, here’s how it works.
The trustee who wants to buy the home borrows the money from a third-party lender (a bank, say). The loan is secured by the house, and then the lender distributes the entire residence to the buyer of the home encumbered by the loan amount and dispenses an equivalent value in cash to the other sibling heir(s). There would be no change in ownership and, thus, no reassessment. The owner of the home would be responsible for paying back the loan, of course.
Clarifying Examples
In each case, we assume:
- The home has a value of $1,000,000.
- The trust allows a non-pro-rata division of assets.
- The trust permits the trustee to borrow money.
- A Claim for Reassessment Exclusion has been filed.
- There are only two siblings/beneficiaries.
Scenarios
Scenario #1: The only asset in the trust is the family residence. After the trust administration, the home is allocated by deed 50-50 to two sibling beneficiaries.
Result: No change in ownership = no reassessment.
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Scenario #2: The only asset in the trust is the family residence. The buying sibling raises their own $500,000 to buy out the interest from the other sibling. Ownership changes for 50% of the home, and the reassessment is made on that half, which increases the property tax bill.
Result: Change of ownership on half = reassessment on half the home.
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Scenario #3: The trust has $1,000,000 in cash and the home. If the siblings agree, one sibling takes the home, and the money goes to the other.
Result: Same as in #1 — No change in ownership = no reassessment.
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Scenario #4: The only asset in the trust is the home. Sibling A borrows $500,000 from a third-party lender (TPL). The TPL distributes the home encumbered by the loan to the “buyer” sibling and pays the “seller” sibling the $500,000 in cash. The house has not changed ownership.
Result: Same as in #1 — No change in ownership = no reassessment.
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Scenario #5: The trust comprises the family residence and $200,000 in cash, for a total trust estate of $1,200,000. The trustee borrows $400,000 from a third-party lender, and that lender distributes the family home (with the $400,000 loan against it to one sibling), and the other sibling gets $600,000 in cash.
Result: Same as in #1 — No change in ownership = no reassessment.
OUR ADVICE: Don’t try this on your own
Work with experienced individuals. As always, we recommend that you surround yourself with people (like The CREM Group) who are knowledgeable about markets, homes, neighborhoods, lenders, and tax ramifications of any real estate transactions—whether probate, conservatorship, trust, or otherwise.
We know many accountants and probate/trust attorneys. And the people on our team suggest you speak with experts who can suggest legal means to save on taxes. Here’s why: These transactions (and other real estate trust dealings) must be handled carefully. Be sure that a suitable lender is engaged who will provide adequate documentation furnished to the County Assessor.
We recommend that an attorney familiar with trust administration work with you on probate matters before you’re in the thick of selling and dividing. Preserving your parents’ low property tax base can result in savings of thousands of dollars. In fact, it could mean the difference between keeping the family home and having to sell it!
As long-time probate real estate agents and as attorneys working in and around all kinds of properties in Los Angeles and Orange Counties, The CREM Group has made sure we support our clients, so we know the alternatives to buying, selling, or renting probate, trust, and conservatorship homes and commercial properties in California.
As always, contact us by email here if you have any questions about “standard” real estate, probate real estate, conservatorship, or trust real estate properties, especially in Los Angeles and Orange Counties in California.
Or directly:
Mark Cianciulli, Esq.
[email protected]
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DISCLAIMER: This content is meant purely for educational purposes. It contains only general information about real estate and legal matters. It is NOT legal advice and should not be treated as such. We recommend consulting a legal or tax professional before acting on any material, opinion, or perspective described herein.