California normally requires a home or other real estate to be reappraised for property tax purposes when it is sold or its ownership is otherwise transferred. There’s an important exception to this rule: reassessment can be avoided when a property passes from a parent to a child.
That’s a one-time benefit, however, as a taxpayer was reminded in a recent decision by the California Court of Appeal (Bohnett v County of Santa Barbara.)
In 1999, Bernard and Sheila Wehe created a trust, funding it with their home and other property. After their death, the Trust assets were to be distributed equally among the 13 Wehe children.
Sheila died in 2003, followed by Bernard in 2008. The 13 siblings couldn't decide what to do with the home, so they rented it out and divided the rental income equally among themselves.
Four years after Bernard's death, the successor trustee filed a “claim for reassessment exclusion” with the County of Santa Barbara, based on the exception for transfer of ownership of the home from the parents to their children. The County granted the claim and the home was not reassessed.
Since the home remained in the Trust and no "sale" had occurred, the Wehes did not record a Grant Deed or Quitclaim Deed when they filed the claim for reassessment exclusion.
The exemption from reassessment was based on two California statutes.
Proposition 13, enacted in 1978, declared that tax on real property is to be based on its appraised value when purchased or constructed, or when a change in ownership occurs.
This meant that Californians would not see their homes reappraised as long as they retained ownership, regardless of changes in market value.
In 1986, California voters approved Proposition 58, which extended that benefit. It said the transfer of a principal residence from parents to their children would also be exempt from reassessment.
Such a transfer is presumed to occur at the time of death of the parent, even if the so-called “Proposition 58” request for exclusion from reassessment is filed later, as happened after Bernard died.
In May of 2013, John Bohnett, one of the 13 siblings, purchased the home from the trust for just over $1 million. The proceeds were distributed to all 13, including him.
The same day as the purchase was recorded, John filed a second Proposition 58 claim for exclusion from reassessment on the home. His reasoning: since the home was still owned by the trust, its transfer to him was really just a two-step transfer from his parents.
The county rejected his claim and changed the assessed value of the home from $157,731 to $962,873.
John sued, the trial court ruled against him, and John appealed.
The appellate court agreed with the trial judge. The fact that title to the home was held by the trust didn’t matter. The actual ownership of the home had transferred to the 13 children in 2008, when Bernard Wehe died.
That parent-to-children transfer clearly qualified for the rule exempting the property from being reassessed, the appellate justices said.
But John's purchase resulted in a sibling-to-sibling sale, which does not enjoy any protection under the two propositions. Thus, the county was correct to appraise the home at its market value.
The appellate court said John had to pay the higher property taxes, and it also ordered him to pay the county’s costs on appeal.
What could these folks have done to avoid the property tax reassessment?
If the Trust had sufficient liquid assets, the trustee could have given the home to John and distributed the liquid assets to his 12 siblings.
Alternatively, the trustee could have obtained a loan and used the loan proceeds to equalize the payments among the 13 children.
John could have also obtained a loan from a lender and purchased the home directly from the trustee, so only one claim for reassessment exclusion would have been filed with the County.
But because he didn’t plan properly, John ended up owning a home assessed at six times what it would otherwise have been.
It's important to note that these events occurred long before the passage in November of 2020 of Proposition 19, which limits the parent-child exemption to a child who uses the home as his or her primary residence and excludes only up to $1 million of value over the assessed value at the time of the transfer. This, and legislation affecting the homestead exemption, means the parent-child exemption is likely to be an important consideration for anyone doing estate planning.
By Lynda I. Chung