Q. My mom owned her home for 25 years before she recently passed, and she held that in her trust. Her trust leaves it 50-50 to my brother and me. I would like to keep the home by purchasing my brother’s interest for cash, and he is okay with that. Is there a way that we can do this without triggering a property tax reassessment, especially now that Prop 19 has passed?
A. Yes there is! However, the matter must be handled in a special way.
Background: Proposition 13, which California voters passed in the 1970’s to hold the line on property taxes, nevertheless allowed the County Assessor to reassess property whenever there was a “change in ownership”. Proposition 58, which the voters adopted later, provided that a transfer of a home between parent and child would not be considered a “change in ownership”, provided that a Claim for Reassessment Exclusion were timely filed. Proposition 19, which became law in early 2021, adds another layer of complexity to this matter.
Under these Propositions, your purchase of your brother’s 50% interest using your own money would be deemed a “change in ownership” as to that 50% portion, because it would be deemed a non-exempt transfer between siblings, rather than a parent to child transfer. Your purchase of your brother’s half interest would then trigger a reassessment as to that 50%, and a higher property tax going forward.
Good news, however! There is a workaround that has been approved by the California State Board of Equalization (“BOE”). If — rather than using your own money — the trustee of the trust borrows money from a third-party lender, securing that loan by the home, itself, and then distributes the entire home to you (encumbered by the loan amount) and an equivalent value in cash (funded by the loan) to your brother, there then may be no change in ownership and no reassessment, assuming that the value of the home is not more than $One Million above than its assessed value when owned by your mother. You would then be responsible for the loan. Per recent advice from the BOE, this strategy still works after Prop. 19!
To illustrate how this applies in various fact patterns, assume the following facts: In each case assume that the home has a value of $500,000, that the trust permits a non-pro rata division of assets, that it also permits the trustee to borrow money, that you move into possession and treat the home as your own principal residence within one year of your mother’s death, that the value of the home has not increased more than $One Million beyond its taxable value when owned by your mother, and that you file a timely Claim for Reassessment Exclusion:
1) Scenario #1: The only asset in the trust is the home. At the conclusion of trust administration, it is allocated by deed 50-50 to you and your brother. Result: Change in ownership but only as to 50% owned by your non-resident brother. Reassessment as to 50% of the home’s value.
2) Scenario #2: The trust is comprised of the home and $500,000 in cash. The entire home goes to you and all the cash to your brother. Equal division and no reassessment.
3) Scenario #3: The only asset in the trust is the home. The Trustee borrows $250,000 from a third-party lender, and distributes the home encumbered by the loan to you and the $250,000 in cash to your brother. Equal division and no reassessment.
4) Scenario #4: The trust is comprised of the home and $100,000 in cash, for a total trust estate of $600,000. The Trustee borrows $200,000 from a third-party lender, and distributes the home encumbered by the loan to you and $300,000 in cash to your brother. Equal division and no reassessment.
Note: These transactions must be handled very carefully, a suitable lender engaged and adequate documentation furnished to the County Assessor. This is not a do-it-yourself project, and it is strongly recommended that these transactions be fully supervised by an attorney familiar with trust administration, non-pro rata distributions of trust assets, and Proposition 19.
If handled correctly, preserving a parent’s low property tax base can result in thousands of dollars in savings over time and help make retention of the family home affordable going forward.
