Property Tax Planning

Property Tax PlanningProperty Tax Planning

You pay a property tax on real estate you own. The property tax is based on your assessed value, which is generally the purchase price you paid for the property increased annually by a specific percentage.

Without proper planning, the property taxes owed on real estate may increase unnecessarily.

California law provides, generally, that whenever real estate is transferred, the value of the real estate is reassessed for property tax purposes to its current fair market value. For instance, if you own your home with an assessed value of $500,000 (because you purchased it many years ago) and I buy your home at its fair market value of $2 Million, my assessed value will be $2 Million, and I will pay four times more property taxes than you were paying.

There are several exceptions to the reassessment law, two of which involve transfers between a parent and a child. While these exceptions also apply to transfers from a child to a parent, we will discuss them in terms of a parent to a child.

The first exception provides that a parent can transfer his or her residence to a child and the residence will not be reassessed. If a parent has lived in the house for many years and the assessed value is much lower than its fair market value, the child can keep the parent’s assessed value.

A second exception provides that a parent may transfer up to $1 Million of assessed value to a child without reassessment.

On every transfer of real estate between a parent and a child, it is important to review all the potential property tax issues that can arise and try to avoid a property tax reassessment whenever possible.

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