Property Tax Avoidance in California

[Nicole Holcomb]

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!

[Rob K.]

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.