Q. My mom owned her home for 25 years before she recently passed. Her trust leaves it 50-50 to my brother and me. I would like to keep the home by purchasing my brother’s interest for cash, and he is okay with that. Is there a way that we can do this without triggering a property tax reassessment, especially now that Prop 19 has passed?
A. Yes there is! However, the matter must be handled in a special way.
Background: Proposition 13, which California voters passed in the 1970’s to hold the line on property taxes, nevertheless allowed the County Assessor to reassess property whenever there was a “change in ownership”. Proposition 58, which the voters adopted later, provided that a transfer of a home between parent and child would not be considered a “change in ownership, provided that a Claim for Reassessment Exclusion were timely filed. Proposition 19, which became law in early 2021, must now also be considered.
Under these Propositions, your purchase of your brother’s 50% interest using your own money would be deemed a “change in ownership” as to that portion, because it would be deemed a non-exempt transfer between siblings, rather than a parent — child transfer. Your purchase would then trigger a reassessment as to that 50%.
Good news, however! There is a workaround that has been approved by the California State Board of Equalization (“BOE”). If — rather than using your own money — the trustee of the trust borrows money from a third-party lender, securing that loan by the home, and then distributes the entire home to you (encumbered by the loan amount) and an equivalent value in cash to your brother, there then may be no change in ownership and no reassessment, assuming that the value of the home is not more than $One Million more than its taxable value when owned by your mother. You would then be responsible for the loan. Per my recent advice from the BOE, this strategy still works after Prop. 19!
To illustrate how this applies in various fact patterns, consider the following scenarios. In each case assume that the home has a value of $500,000, that the trust does not prohibit a non-pro rata division of assets, that it permits the trustee to borrow money, that you move into possession and treat the home as your own principal residence, that the value of the home has not increased more than $One Million beyond its taxable value when owned by your mother, and that you file a timely Claim for Reassessment Exclusion is filed:
- The only asset in the trust is the home. At the conclusion of trust administration, it is allocated by deed 50-50 to you and your brother. Change in ownership but only as to 50% owned by your non-resident brother. Reassessment as to 50%.
- The trust is comprised of the home and $500,000 in cash. The home goes to you and all the cash to your brother. No reassessment.
- The only asset in the trust is the home. Trustee borrows $250,000 from a third-party lender, and distributes the home encumbered by the loan to you and the $250,000 in cash to your brother. No reassessment.
- The trust is comprised of the home and $100,000 in cash, for a total trust estate of $600,000. Trustee borrows $200,000 from a third-party lender, and distributes the home encumbered by the loan to you and $300,000 in cash to your brother. No reassessment.
Note: These transactions must be handled very carefully, a suitable lender engaged and adequate documentation furnished to the County Assessor. This is not a do-it-yourself project, and it is strongly recommended that these transactions be fully supervised by an attorney familiar with trust administration and Proposition 19.
If handled correctly, preserving a parent’s low property tax base can result in thousands of dollars in savings over time and help make retention of the family home more affordable.
References: Text of Prop 19
CAUTION: Before undertaking any of the strategies above, consider the effect of Proposition 19, narrowly passed by the electorate on November 3, 2020.Its provisions, making dramatic change to the Parent–Child Exclusion, become effective February 16, 2021. See the following article on topic: “Preservation of Parent’s Low Property Tax Rate Soon To Be More Difficult For Children: Planning Window Closing”. Prop 19 must now be considered before undertaking any of the strategies outlined above, and will be controlling to the extent of any conflict with prior law and prior BOE Letters and opinions, including those referenced below. That said, we have secured informal advice from the BOE that the Non-Pro Rata Distribution discussed herein has not been changed by Proposition 19, provided that other Prop 19 criteria are met as to the home, citing BOE Letter of 02/16/2021 entitled “Intergenerational Transfer Exclusion Guidance. Questions and Answers”, calling attention to Q&A # 25 on page 5 of that Letter.
Unwinding An Improperly Handled Change in Ownership. In the event the transaction is not handled properly after Prop 19, and the Assessor proposes to Reassess the property after transfer at its much higher current value, there may be a way to “unwind” the transaction with all parties’ agreement, restore them to their status prior to the improvident transaction, and then re-do the transaction properly with the aid of a knowledgeable attorney. This should be completed within a reasonable time following the initial transaction and would involve a formal Rescission of the problem deed. See, BOE Property Tax Annotation 220.0599, California Civil Code § 1698(a), BOE Letter No 2021/033 (08/06/2021), and this Notice from the website of the Los Angeles County Assessor: