Realtor · Encinitas, CA · Member since 2020 · 125 posts · 92 votes
Hi BP!
I have a client in San Diego that just inherited a 4 Plex worth $1,300,000. The property is in a trust and has been passed down to share between 3 siblings. My client wants to buy out his other two siblings but is also looking to avoid a property tax reassessment. I have done some research but am struggling to find information on how to skirt the property tax reassessment on a multifamily property. Help please!
This can get complicated and client will need to get professional help to navigate this. First, assuming the property is or was held in parent's trust, the successor trustee and transferee(s) need to file for a parent/child exclusion to avoid reassessment. If the property has already transferred to three siblings, the act of a buy out will trigger reassessment on 2/3 of the property.
If the property is still in trust and has not yet been distributed, there may be more options. If the declaration of trust permits the trustee to distribute assets in kind and there are sufficient assets in the trust such that distributions could be equalized with one sibling receiving the 4 plex and other siblings receiving other assets that may work. If this is not the case, then assuming there is sufficient equity, the trustee might obtain a secured cash out loan against the property (probably at higher rates then conventional commercial) and after the loan funds, the trustee would then distribute the cash to the siblings who want to be bought out, and the 4plex to the sibling who wants it with the loan still in place.
It is important that all transactions take place within the trust prior to distribution in order to avoid reassessment. Successor Trustee, whoever that is, needs to honor the language of the trust and retain professional assistance to do this right.
This can get complicated and client will need to get professional help to navigate this. First, assuming the property is or was held in parent's trust, the successor trustee and transferee(s) need to file for a parent/child exclusion to avoid reassessment. If the property has already transferred to three siblings, the act of a buy out will trigger reassessment on 2/3 of the property.
If the property is still in trust and has not yet been distributed, there may be more options. If the declaration of trust permits the trustee to distribute assets in kind and there are sufficient assets in the trust such that distributions could be equalized with one sibling receiving the 4 plex and other siblings receiving other assets that may work. If this is not the case, then assuming there is sufficient equity, the trustee might obtain a secured cash out loan against the property (probably at higher rates then conventional commercial) and after the loan funds, the trustee would then distribute the cash to the siblings who want to be bought out, and the 4plex to the sibling who wants it with the loan still in place.
It is important that all transactions take place within the trust prior to distribution in order to avoid reassessment. Successor Trustee, whoever that is, needs to honor the language of the trust and retain professional assistance to do this right.
@ Rob K. Thank you for your input. My research suggested a similar solution to the one you posed regarding getting a loan against the property and then distributing the funds to the siblings that way.
Do you know anything about the parent/child exclusion being limited to $1,000,000 on multifamily properties?
@Rob K. response seems very good, but I want to add that one of the two proposed prop 13 amendment initiatives (prop 19) eliminates the Prop 13 tax bases transferring to children and grandchildren if the unit is not the primary residence (I.e. rentals and vacation/second homes). I do not know the odds of passage, but I will be voting against it even though there is one aspect I like.
The reason I mention this is there may be a time constraint on wanting to complete all aspects of this transfer of tax basis prior to the election.
Thank you for your input and I too will be voting against the amendment initiatives. In doing a bit more research The $1,000,000 exclusion appears to be calculated on the factored base year value, not the fair market value.
The factored base year value (FBYV) of real property is the market value as of 1975 or as established when the property last changed ownership or was modified due to construction. This amount is then increased by no more than 2% each year.
Thank you for your input and I too will be voting against the amendment initiatives. In doing a bit more research The $1,000,000 exclusion appears to be calculated on the factored base year value, not the fair market value.
The factored base year value (FBYV) of real property is the market value as of 1975 or as established when the property last changed ownership or was modified due to construction. This amount is then increased by no more than 2% each year.
Is this correct?
This is another area that can get very complicated depending on the circumstances. The legislation that covers this is in CA Revenue and Taxation Code Section 63.1, to long to try to quote here.
Sibling Transfers are so difficult to begin with. Help us to #FiXProp19 by #RepealTheDeathTax. Download, print, wet ink sign and submit. Signer can be Circulator (witness for self and others). Complete BOTH sections. We need 1.3 million signatures to get on November 2024 ballot. Volunteer and Download petition at ForCalifornians.com or RepealTheDeathTax.com.