California Property Tax Basis Rollover

I recently had the honor of speaking at a workshop sponsored by the Los Angeles Collaborative Family Law Association about a variety of divorce related tax topics.  Somewhat to my surprise the participants were particularly interested in the topic of California real property taxes and the available basis rollover, especially a few divorce related nuances of which I wasn’t fully versed in at the time of the workshop. As a result, I have fully researched the topic. The following is a summary of the key provisions:

Property Tax Assessment Summary
As most California residents know, Proposition 13 provides that California home values may only be reassessed when there is a change in ownership or new construction (a topic for another discussion). Furthermore, assessed values can go up by an inflation rate not to exceed 2 percent a year (homeowner’s can get temporary reductions when property values go down).

Basis Rollover Provisions
Propositions 60 and 90 provide that certain California homeowners may carry over their existing property tax basis when they sell and downsize their principal residence as follows:

Basic criteria – The homeowner or a spouse residing with the homeowner must be 55 or older, the new home must be in the same county as the old one or in one of nine counties that accept transfers of base-year value from other counties, and the new home must be purchased or built within two years – before or after – the sale of the original property.

Availability – This exemption may only be claimed once in a lifetime. Once you have filed for and received this tax relief, neither you nor your spouse (even if they are not over 55 years old) who resides with you can ever file again except in certain cases of severe and permanent disability.

Time for applying – A claim for the exemption must be filed within three years following the purchase date or new construction completion date of the replacement property.

Downsizing – If the new house is purchased before the old house is sold, the price of the new home cannot exceed 100 percent of the old home’s sale price; if the new house is purchased within one year after the old house is sold, the price of the new home cannot exceed 105 percent of the old home’s sale price; if the new house is purchased more than one year after the old house is sold (but within two years of sale), the price of the new home cannot exceed 110 percent of the old home’s sale price.

Divorce Related Issues
Multiple Replacement Properties – If two or more replacement dwellings are separately purchased or newly constructed by two or more co-owners and more than one co-owner would otherwise be an eligible claimant, only one co-owner shall be eligible under this section. These co-owners (or spouses) shall determine by mutual agreement which one of them shall be deemed eligible. (California Revenue and Taxation Code Sec. 69.5)

Mutual agreementPlanning opportunity: this basis rollover has value and this value should be considered as part of the settlement agreement.

Lack of Agreement – County Assessor guidance states that “the assessor will not be placed in the position of mediating disputes”.  Further, the assessor will not disqualify a claim for the base year value transfer if a person files a claim even though that person agreed that the other party should receive the relief. Therefore, it may make sense to apply as early as possible after purchase or construction.

Transfers Pursuant to Divorce – The California Revenue and Taxation Code does specifically exempt transfers between spouses pursuant to divorce from causing a property reassessment.  Planning opportunity for divorcing spouses over 55 year old: if more than one home is owned and awarded to each spouse such that it becomes their residence, they will both be eligible to rollover the basis to a new residence.

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