California property tax laws, the devil is in the details

April 3, 2019

Stew Jenkins

By STEW JENKINS

Since the adoption of Proposition 13, tweaks by the Legislature and by ballot initiatives have made California’s real property tax provisions more and more complex. So complex that handling home purchases with only the help of a title company, instead of with legal advice, can become a fools’ errand. [Cal Coast Times]

Wright v. County of San Mateo, which was decided last week by the First District Court of Appeal, extended the rights of Californians over the age of 55 to retain their property tax assessment when they sell and then replace their home, but only in particular circumstances.

The Justices agreed that California’s Revenue and Taxation Code is extraordinarily complex with pages of dense, convoluted and interrelated provisions. Under subdivision (a)(1), any person over the age of 55 years who resides in property that is eligible for the homeowners exemption, may transfer, subject to conditions and limitations, the base year value of that property to any replacement dwelling of equal or lesser value that is located within the same county and is purchased or newly constructed by that person as his or her principal residence within two years of the sale by that person of the original property.

In simple terms, an elderly person has a two-year window to transfer the Proposition 13 fixed property tax assessment after selling one home into a new one, so long as the new home is not more valuable than the one sold, and each is their primary home. But detailed “conditions and limitation” contained in this twelve-page single code section are so intricate that pitfalls for the unwary abound.

Financing institutions can impose unique and inexplicable requirements for their own business reasons on people buying property. And those imposed requirements can make it impossible to transfer their Prop. 13 assessment to the replacement home, without extra steps. Wright v. County of San Mateo is a case in point.

Mr. and Mrs. Wright’s lender required them to form a Limited Liability Company (LLC) and transfer title of their newly purchased lot to the LLC, all as a condition of obtaining a construction loan for building their replacement home on that lot, according to the Court of Appeal.

How did this foul up the Wrights? The statute excludes any “firm, partnership, association, corporation, company, or other legal entity or organization of any kind” from being considered “a person” who can transfer to a replacement residence the Prop. 13 assessment from their prior home. This limitation is fully seven pages into the 12-page statute.

Whether the Wrights got legal advice after finishing the construction of their new dream home is not addressed by the Court of Appeal ruling. But, critically to the outcome, after they had completed the construction, but before they applied to be exempt from new assessment, the Wrights transferred title of their new dream home back to themselves, bringing it out of the LLC.

So, what happened to Mr. and Mrs. Wright? Litigation. Lots of Litigation.

When they applied to the San Mateo County assessor to exempt their replacement home from property taxes based on its current value, that was denied. The assessor determined that because the lot was owned by their LLC when the Wrights sold their older home with the lower Prop. 13 assessment, four months before they finished the new residence, moved in and deeded it to themselves out of the LLC, that they did not qualify for the exemption from assessment of the new home at current values.

The Wrights appealed to the San Mateo County Assessment Appeals Board … who agreed with the county assessor that the temporary LCC ownership barred the Wrights from transferring the assessment of their old home to their new one.

The Wrights paid the higher tax; and then filed suit in superior court for a refund. The court then issued a summary judgment in favor of the county. That judge held that as long as the home had been purchased and constructed through the Wright’s LLC, the Wrights were wrong.

Demonstrating incredible commitment to principle, in spite of the cost, the Wrights appealed the summary judgment to the 1st District Court of Appeal. There, finally, the Wrights won a careful, complete analysis of the twelve-page Revenue and Tax Code, Section 69.5.

The court held that nothing in that section required the Wrights to personally own the lot during the time that they were constructing their retirement home. The appeals court held that this “extraordinarily complex” code section “only requires that the Wrights own the replacement home ‘at the time of claiming the property tax relief.’ The Wrights would not be entitled to tax relief if title to the property had still been held by the LLC when they submitted their claim for relief.

Only because they had put their home back in their own names before asking the assessor to apply their old home’s tax assessment to their new home did the court of appeal rule that, in fact, the Wrights were right. The trial court was reversed and directed to enter orders consistent with the Court of Appeal’s ruling.

The lesson of Wright v. County of San Mateo for home owners

Anytime a complex structure in the purchase of a new residence is imposed by a lender, or a change in the character of title is demanded, consult an attorney. Those lender demands could deprive you of a property tax exemption, remove the property from a family trust, or have other negative consequences.

Stew Jenkins is a San Luis Obispo County attorney practicing in San Luis Obispo since 1978. Jenkins’ handles Municipal law, Brown Act and Public Records Act cases, taxpayer suits, public interest proceedings, estate planning and family law. He supports open government, the rights of working people to organize unions, growing the local economy with project labor agreements, the right of all people to health care, and equal access to justice.


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Ccna

Very interesting article, Stew. I read the case and statute it interprets and as you said, very complicated. Readers should remember that this statute implements a constitutional amendment that was approved by voters and does provide a great benefit to taxpayers. I can see why the assessor interpreted it the way they did since the home has to be purchased or newly constructed by a “person” and “person” is subsequently defined in the statute as an individual and excludes corporations and LLCs from the definition. So, since the LLC owned the property while the home was being constructed it is understandable why the assessor denied the exemption in the beginning. It is good now that the court has weighed in and provided direction to interested parties. Hopefully, taxpayers that have been denied for the same reason in the past can re-apply for this benefit and receive prospective relief.


If you’re asked to change the method in which you hold title you should be concerned and make sure to understand the legal consequences. You could ask your local assessor before changing title, however, there could be income tax consequences as well. Consult an attorney in advance as Stew suggests. The upfront attorney costs will likely save you much more than the cost of a mistake in the long run.


oxforduniversity

Well if Steward Jenkins is so concerned about prop 13 yet his ACLU that went after proposition 187 that was passed by the voters in 1994 his ACLU gave illegal immigrants free healthcare costing California taxpayers more than $63 billion dollars since 1998 for free healthcare to illegal immigrants going to emergency rooms you tell me Steward if you’re so worried about prop 13 you should be more worried about prop 187 cost California but the ACLU did not protect Californians they protected illegal immigrants that are foreign Invaders. The ACLU crossed the line and hurt California taxpayers.


sbjcl

Classic example how stupid laws make lawyers rich. Excellent example of the aggressiveness by the county assessors to intimidate the public as much as possible. It was obvious what the INTENT of of the taxpayer was and have to spend a fortune to prove it is shameful.


sloweb

Thank you for this eye-opener.


AmericaTheFree

The devil is in the details? Nope! The devil is in the fact that I have to hire some hack from the good ol’ boy network to interpret the law for me at what, $300 to $350 an hour? There in lies the devil… It’s time we dismantle our legal system and replace it with something where a person can walk into a court of law and present his or her case in plane and simple terms and have a judgement handed down based on the simple facts.


LameCommenter

Jenkins appears likely correct, as is often the case and there are more pitfalls. Say you and three siblings inherit a prop 13 low tax bill residence. To be fair you purchase the shares of your siblings and expect to retain the prop 13 tax bill Per prop 58, on the entire house. If dad left the house in a trust, the taxing authority may decide to announce that you inherited 1/4 but “purchased” 3/4 from siblings and are not entitled to any but 1/4 of the old annual property tax savings (the low Prop 13 assessment.)


Fortunately we went through the annoying steps dictated by legal counsel and retained that LA County low assessment in full. We were told if you do a goof up, there’s no going back, no appeal, Dad’s low assessment would be largely lost.


Hold your nose and see a lawyer. This is an instance where they truly earn their keep.