There are several aspects of changing property ownership that an attorney must be aware of so as to not separate property inadvertently for income tax purposes. There are some pitfalls to beware of when completing these transfers.
A Preliminary Change of Ownership Report must be filed in the event of the death or a Trustor, Spouse, Domestic Partner or Joint Tenant to make known to the assessor why the transfer is excluded from reassessment. The reason this type of transaction is excluded is because it is not deemed as a change in ownership. Upon the death of the second spouse or domestic partner, the deed is transferred to the children and the children will keep the same property tax base and it is not to be reassessed. The same applies for a transfer of real property from a parent to a child or child to a parent whether it is a gift or a sale. In some cases this also applies to a transfer from grandparent to grandchild, if the parent of the grandchild is deceased as of the date of purchase or transfer.
Many people choose to transfer assets out of their name to lower the value of their taxable estate upon their deaths. The transfer of property out of their name into the names of their children makes a logical asset to gift to their children. There are Federal Lifetime Gift Tax Exemption amounts that need to be considered. Using entities such as LLCs and Family Limited Partnerships allows parents to remain in control of the assets, maintain management positions and obtain income. Parents will often give minority interests to their children at considerable discounts.
Separate exemption rules apply for transfers involving legal entities like corporations, partnerships and LLCs. Transfers of interest in these types of legal entities between parents and children do not qualify for the tax exemption because it is limited to real property. Trusts aren’t considered legal entities for this purpose. If the legal entity buys property, the result is a reassessment. If the ownership interests of the transferor and the transferee are identical, transfers of real property are exempt from reassessment.
A difficult area in avoiding property reassessment is when there are multiple beneficiaries and whom are not all children. The property must be all left to a child in order for it to be exempt.
When real property in California is involved, property tax considerations can be as important as income or gifting and with careful and legally guided planning, possible expensive reassessments can be avoided.