Under Proposal A, passed in the mid-1990s, the taxable value of a parcel of property cannot increase from one year to the next by more than five percent or the increase in the consumer price index, whichever is lower. However, at the time of a “transfer of ownership” the assessment will “uncap” and the property will be taxed based upon its current State Equalized Valuation (“SEV”), which is 50% of its true cash value. (This is commonly referred to as the “pop-up” tax.)

The concept of what is a “transfer for ownership” was liberalized for calendar year 2014 and has just been further expanded in House Bill 5552 effective for transfers on or after December 31, 2014. The definition of transfer of ownership depends on the time of the transfer:

Prior to 2014 a number of transfers were exempt from the transfer of ownership rules including “a transfer from one spouse to the other spouse,” and a “transfer into a trust where the settlor or the settlor’s spouse conveys property to the trust and is also the sole beneficiary of the trust.” A transfer from a trust or a decedent to anyone other than a spouse, including a child, was not exempt, thus resulting in an uncapping.

For 2014 a transfer from a parent to a child was added to the pre-2014 list of exemptions, but a transfer from the parent’s trust or from the parent’s estate to a child was not. Thus, to avoid uncapping in 2014 a parent had to add his or her children as co-owner on their deed in order to avoid uncapping. (It is still unclear whether a Ladybird deed – a transfer that is effective
at death – qualified for the exemption.)

Starting December 31, 2014, the new bill broadly expands both the categories of exempt transferees and exempt transferors. Transferees: In addition to a child, the new law permits residential real property (not commercial property) to be transferred to a parent, sibling, adopted child, or grandparent. Transferors: Now, exempt transfers include the settlor of a trust, a decedent, or the spouse of a transferor, settlor, or decedent. (Although it would seem to be exempt, as of this writing it is still unclear whether a Ladybird deed qualified for the exemption.)

The new rules are most relevant in cases where “heirloom” property is intended to be kept in the family. In such cases, children will be able to continue to pay property taxes on the same taxable value (as adjusted from year-to-year) that their parents enjoyed.

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