Some Real Estate Deals Escape Reassessment
QUESTION: We are planning to move to a retirement community out of state and our daughter wants to buy our house from us. Our house has appreciated considerably in the five years we have owned it and I know our daughter could not afford to pay the property taxes on it if she were forced to pay what the law requires, about 1% of the sales price. Is there some way she can retain our property tax level?--A. T. R.
ANSWER: Yes, there is. In November, 1986, California voters approved Prop. 58, a constitutional amendment that excludes certain transactions from the automatic reassessment that typically accompanies real estate sales. Among those special transactions is the transfer of a principal residence between parent and child.
According to the Los Angeles County assessor’s office, a qualified buyer should apply for the Prop. 58 reassessment exclusion when the deed transferring ownership of the house is filed with the county recorder’s office. There is no sales price limit on the transfer of a principal residence between parent and child.
Other transactions excluded from reassessment are transfers of real estate between spouses and transfers of the first $1 million worth of real estate--other than a principal residence--between parent and child. For the purposes of the amendment, children are liberally defined to include stepchildren and their spouses, sons-in-law, daughters-in-law and legally adopted children who were adopted before turning age 18.
Unless a Prop. 58 exemption is sought, the county assessor’s office will automatically reassess a newly sold piece of property. Generally the value assigned to the property is the most recent sales price. Property taxes are 1% of the assessed value, plus any local bonded indebtedness or special assessment.
Q: Your recent column on split annuities intrigued me. Can you tell me where I can buy these plans? My broker is not familiar with them.--M. C. S.
A: Generally speaking, annuities--split or otherwise--may only be issued by life insurance companies and may only be sold by individuals licensed to sell life insurance. Typically, these investments are created by any one of a large number of insurance companies and then marketed through an even larger number of outlets, without the buyer really knowing how it all evolved.
If a stockbroker has the appropriate life insurance license, he or she may sell annuities. They are also generally available from financial planners and--most obviously--from insurance salespeople.
However, before rushing off to buy a split annuity, or any other type of annuity, you would be well served to review your current financial situation and goals for the future with a qualified financial planner, accountant or tax attorney. But be careful when discussing this subject with financial planners affiliated with a particular investment sales company. These individuals are able to sell only a particular company’s annuities, and you may get less than the full story that you need to make an informed decision.
You should also try to learn something about these investments from an objective source. Among the recommended sources are personal finance books by both Sylvia Porter and Venita Van Caspel, two of the best-known authors on personal finance. Another source is Consumer Reports magazine, which periodically evaluates and rates various annuity plans.
Q: Can the title to a piece of real estate be transferred from father to son without an exchange of money? If so, is there a tax at the time, or is it deferred?--A. R. R.
A: Yes, an individual can give another person a piece of property without an exchange of money. This activity is commonly called giving a gift.
Whether or not the gift is taxed depends on the value of the property and the donor’s particular tax situation. You have not given us enough information to evaluate your circumstances. However, a qualified tax adviser, tax lawyer or financial planner can give you the assistance you need.
Nevertheless, we can tell you that in the very likely event that the value of the property exceeds $10,000, the donor must file a Gift Tax Return, Form 709, with the Internal Revenue Service. The form is due by April 15 of the year following the year in which the gift was made. A simple rule of thumb for determining value is to add the donor’s purchase price of the real estate together with the value of any improvements made to the property.
Q: I purchased my residence in 1978. The grant deed was recorded June 8 of that year. Immediately, the property taxes on the house tripled. I think I should be covered under the provisions of Prop. 13, the Jarvis Amendment, since I just got in under the wire. Am I correct in continuing to fight this battle?--H. M.
A: This isn’t what you want to hear, but you are probably fighting a losing battle. According to the Los Angeles County assessor’s office, your purchase is not covered by Prop. 13, and it’s not because the grant deed was recorded the day the amendment was approved by California voters, as you probably have assumed.
Actually, the Jarvis Amendment rolled back the assessed value of California real estate to its value as of March 1, 1975--or any date thereafter that a buyer bought a piece of property or undertook any improvements to an existing building.
For example, a person who had continuously owned a piece of property since April, 1972, would have seen his property values rolled back to their March, 1975, levels under the Jarvis amendment. However, for a person who bought a home in July, 1976, the amendment would have only rolled back the value to that July, 1976, purchase date.
In your case, if things are working as they are supposed to, the initial assessed value of your home should have been its value as of June, 1978. In the years since, the assessed value should have grown by no more than 2% per year, as dictated by the amendment.
