Property Tax Assessments
The law offices of Kevin J. Moore & Associates have for more than 20 years helped clients avoid triggering higher property tax assessments as well as successfully challenging increased valuations of real property by counties throughout California.
The economic consequences of triggering a property tax assessment are often enormous. This is because an increased property tax assessment applies to every year that you own the property. Thus, even a relatively small increase in annual property taxes can really add up overtime. And when a property has been owned for a long time, a property tax reassessment can have devastating consequences on a family’s business and finances. Under Proposition 13, which was approved by California voters in 1978, property taxes on properties may only be increased 2% annually unless the property changes ownership. Before the passage of Proposition13, properties were reassessed every year. Now property taxes can reflect increases in the underlying value of the property only if the property has changed ownership. Not surprisingly, in an effort to increase the amount of taxes that are collected, County Tax Assessor offices are often aggressive in their interpretation of what constitutes a change of ownership. There are many subtle traps for the unwary.
Avoiding Increased Property Tax Assessments
An important element of tax and estate planning is to make sure that real estate transactions are structured in such a way to avoid a property tax reassessment. In general, a change of ownership can trigger a tax. With respect to the assessment of residential or commercial property in California, the problems typically arise either when you change the form of ownership of the property, such as from an individual owner to ownership by a partnership or LLC, or when you use estate-planning techniques, such as transferring the property to a trust.
There are, however, certain kinds of changes of ownership changes that are by law exempt from triggering a tax reassessment. We use our knowledge of the intricacies of the tax laws to help clients avoid property tax reassessments. For example:
- The Parent-Child Exclusion. With respect to your primary residence you can transfer ownership between parent and child (and vice versa) without triggering a reassessment. This is true regardless of the assessed value of the residence. If the property is something other than a primary residence, you can transfer the property between parent and child (and vice versa) up to a lifetime exclusion of $1 million of assessed value.
- Transferring Property to a Living Trust. Under California law, there is a general exclusion from tax assessments when you transfer a property from an individual owner to a living trust. This, however, doesn’t prevent the assessors’ office from scrutinizing such transfers and asking to see a copy of the living trust. It is therefore important that the transfers in and out of living trust be structured in such a way that it falls within this tax assessment exclusion.
- Changing the Form of Ownership. There are various rules that permit changing only the form of ownership without triggering a tax reassessment. For example, under certain circumstances you can avoid a tax reassessment by transferring ownership of a property from an individual owner to an LLC or partnership. When such a transfer takes place, the assessors’ office invariably requests to see the formation documents for the entity to make sure that the transfer was handled in a way that qualifies for the tax reassessment exclusion.
This is far from a comprehensive list of the kinds of strategies that can be used to help avoid property tax reassessments. Moreover, we often use a combination of these lawful strategies to help our clients avoid property tax reassessments. The best course of action is to address these issues during the estate planning process so that you avoid paying a higher property tax bill in the first place.
Case Study: Preventing Tax Assessment on Beach-Front Home
We represented the owners of a beach-front property that was used as a second home. It was owned by the family for many decades and had a very low base value for property tax purposes (i.e. $650,000.) The matriarch of the family owned 55% of the property and her nephew owned the remaining 45%. The first step in the estate planning process was to take advantage of the parent-child exclusion and transfer 5% from the matriarch to her children. To further protect the family, the property interests of the 3 owners (matriarch, nephew, and children) then transferred their interests in the property proportionately to a single LLC. When the matriarch passed away, her 50% interest passed onto her children through a trust without triggering a tax reassessment. At the time of her death, the estimated market value of the home was between $7 and $10 million. But because of the estate plan that was carried out, no property tax reassessment was triggered, and the family continued to pay property taxes on the $650,000 assessed value.
The Property Tax Assessment Appeals Process
Too often property owners who respond to the county assessors’ office by themselves either provide the wrong documents or otherwise fail to explain how an exclusion from a reassessment applies. This sometimes causes the assessor’s office to mistakenly conclude that the property should be reassessed at a much higher value, which can then lead to a process of appealing or challenging the decision of the tax assessor’s office.
We strongly encourage our clients to let us respond to the county assessors’ office on their behalf
We have since the mid-1990s represented clients in the assessment appeals process. We have successfully represented clients in property tax assessment appeals before county Assessment Appeals Boards throughout northern and southern California including Los Angeles, Ventura, Orange, San Diego, San Mateo, and Alameda counties.
Litigating Property Tax Cases in Court
Most of the time property tax assessment challenges are resolved during the administrative hearing process before the Assessment Appeals Board. Taxpayers in California do, however, have the right to appeal the decision of the county Board to the local Superior Court. Kevin Moore has for more than 20 years been representing clients in property tax cases in Los Angeles Superior court, Ventura superior court, and its counterparts in the counties of San Mateo, Los Angeles, and San Diego
Representing Investors in Luxury Hotels
Even if you can’t avoid a property tax reassessment, you still have the right to challenge the value of the assessed property. We have successfully challenged property taxes on commercial properties throughout California.
One of the most common scenarios in which we have helped clients challenge a county’s valuation of a property involves equity funds and other investors in hotels. The investors acquire the real property on which the hotels operate as well as the various franchise rights associated with the company that operates the hotel. The county often assesses various forms of personal property and attaches it to the value of the real estate itself. In these kinds of cases, we have represented clients not only before the Assessment Appeals Board, but more typically at the Superior Court and the Court of Appeals levels.
For example, we represented investors in a luxury hotel in San Mateo County and argued that the valuation process used by the Assessors’ Office was improper because it included the value of intangible personal property, as well as revenues from ancillary services, such as the restaurants and spas operated on the property. Our client, the investors in the hotel, lost before the Assessment Appeals Board and at the Superior Court, but the Court of Appeals reversed and agreed that the valuation formula used by the assessor’s office included too many revenue sources. This result saved the investors more than $1 million in additional property taxes annually.
CALSTRS v. The County of Los Angeles, (2013) 216 Cal. App. 4th 41, 155 Cal.Rptr.3d 545 review denied 2013 CalLexis 6845.
The California State Teachers Retirement System (“CALSTRS”) is an arm of the State of California. In the 1970s CALSTRS was given the authority to invest their retirement funds into California real estate. Government entities hold property tax free, but when they lease property, the tenants pay a tax akin to a property tax. When the legislature gave CALSTRS the right to invest in California real estate, it created a valuation formula that taxed tenants of their properties at a higher rate than the taxes of tenants of other government owned property. This valuation formula was codified in Section 7510 of the Government Code. Kevin Moore successfully argued that Section 7510 of the Government Code violated the California Constitution.
Too often owners of both California residential and commercial properties assume that there is little they can do when they receive a property tax assessment. That assumption can cost them hundreds of thousands of dollars or more. We encourage you to update your estate plan to find out whether you may be in a position to avoid a property tax reassessment altogether, or whether you have a good basis to challenge the amount of the assessed property tax.