You may have been hearing about Proposition 13 in the news lately. When voters overwhelmingly approved Prop 13 in 1978, they were responding to a populist outcry over steeply rising property taxes. Today the tax initiative seems to be untouchable by politicians.
Under Prop 13, real property (your house) is taxed at a rate of 1 percent of its assessed value, plus any local taxes and other assessments, such as bond measures to fund schools. A property’s assessed value is equal to the fair market value of the property on the date there is a change in ownership, plus an annual inflation adjustment that may not exceed 2 percent of the prior year’s assessed value.
The effect of Proposition 13 has been dramatic. Take your parents for example, who may have purchased their home in 1972 for $35,000. Because of Proposition 13, they currently pay less than $900 a year in property taxes. Today, if you wanted to purchase the home next door to your parents it might cost $400,000 – and you would pay $4,000 a year in property taxes. Why? Because a change in ownership would trigger a reassessment. Fair or not, those are the rules, and the rules are complex and full of “gotcha’s.” A family’s ability to hold on to real property so that it passes down through successive generations often hinges on whether a reassessment of property taxes can be avoided.
Exclusion from Reassessment
Whenever a change of ownership occurs, meaning a deed is recorded at the county recorder’s office, a Preliminary Change of Ownership Report (PCOR) must be filed. A filed PCOR puts the county tax assessor machine into motion, and depending on the boxes checked, you may or may not qualify for a tax reassessment exclusion. If you do qualify, your assessed tax base doesn’t change. If you don’t qualify, your assessed tax base adjusts up or down to match the property’s current fair market value.
So what are these exclusions? Well, if a change in ownership occurred due to the addition or removal of a spouse, death of a spouse, or divorce settlement, your assessed tax base won’t change. The same is true between domestic partners registered with the California Secretary of State. Other exclusions include transfers between parents and children, or between grandparents and grandchildren, but only if the grandchild’s parent is deceased. A transfer into or out of a revocable living trust is also excluded. However, to qualify for these exclusions you must complete and file an additional claim form, and submit supporting information, such as death certificates, marriage certificates, copies of trusts, etc. Further, if you don’t file in a timely manner your claim could be denied.
The Take Away
During the 34 years since Proposition 13 was enacted, property values have increased by far more than the 2 percent maximum annual increase permitted. As a result, the disparity between fair market value and the assessed value of property has widened and the consequences of triggering a property tax reassessment has increased significantly. When contemplating any change in ownership of real property, be sure to seek professional advice. If you fail to comply with the assessors rules, it could cost you plenty.
By David Sarazen, Attorney at Law