What are the Exclusions to Avoid Reassessment of Property Taxes?

It is important to understand what triggers reassessment of real property and what doesn’t. Let’s look at a couple of examples.
1) To avoid property tax reassessment, do NOT transfer real property from individuals to a legal entity (trust, LLC, Corp, etc) UNLESS the individuals have the same proportionate interest in the legal entity as they did in the real property! Let’s say that that you and your wife own a property 50% each. And you want to establish an LLC for that property and add your son to title. So you establish an LLC in which you own 35%, your wife owns 35% and your daughter owns 30%. This method will trigger a reassessment of your property taxes! The way to avoid this is to FIRST add your daughter to title as 35%, 35%, and 30% owners. THEN establish the LLC with the same proportionate ownership interests within the LLC. That will NOT trigger a reassessment.
2) OrIginal Transferor Rule: In a purchase-sale transaction, or in a trust distribution, transfer title to co-owners as tenants in common (‘TIC’), and then transfer property from TIC to Joint Tenants. Then, the co-owners become Original Transferors. If one of them dies, the property will NOT be reassessed! If the co-owners had originally taken title as joint tenants and one of them dies, the real property WOULD BE reassessed (unless another exclusion applies).
Proposition 19 recently passed in California that changed the landscape for property tax reassessment. Here is what it did.
3) Prior to Prop 19, mom and dad could leave their primary residence to their kids and no reassessment would take place. For a quick background, Prop 13 (passed in 1978) mandated a 2% maximum assessed value increase per year. And Prop 58 (1986) excluded reassessment transfers of real property between parents and children. Prop 193 (1986) excluded reassessment between grandparents and grandchildren. With the passage of Prop 19, and effective February 16, 2021, to avoid property tax reassessment to current market value, the children would have to live in mom and dads house as owner occupants! If not, a reassessment to full current market value would occur. Furthermore, even if the child lives in the property, should the fair market value of that property exceed the assessed value by more than $1 million, then the property will be partially reassessed based on the excess amount.
4) Prior to Prop 19, mom and dad could leave properties other than their primary residence to their children with no property tax reassessment, no matter what the total value of those properties were. With Prop 19 passage, only the first $1 million of assessed value of real property is excluded. So if mom and dad left $20 million worth of assessed real estate, their kids would now have to pay property taxes based on the new reassessed value of $19 million.
For more answers to frequently asked questions regarding Proposition 19 affects, please visit the California State Board of Equalization website at BOE.ca.gov/proptaxes/faqs/propositions58.htm. For more info on exclusions to reassessments, visit www.realestateinvestorlaw.com/articles/using-exclusions-to-avoid-reassessment/.
Curt Kravitz is a 35-year Santa Clarita loan officer veteran of the mortgage lending industry. Please reach out to us with any questions on rates, preapprovals, or the mortgage industry at 661-705-2500.