Property Tax Assessment and Tax Basis Transfer – Over Age 55 or Disabled

Generally speaking, whenever California real property is transferred, the County Assessor may reassess the property to establish base value for property tax purposes. There are limits as to how much the value may increase every year due to changes in the market. However, when the property is sold, it may be reassessed at full market value. This makes a big difference if a property had the same owner for many years, and benefits from a low base valuation. Buyers want to avoid a big increase in taxes.

There is an exception that applies to a residence owned by any person over the age of 55 years, or any severely and permanently disabled person. The base-year value of that property may be transferred 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, provided that the base-year value of the original property may not be transferred to the replacement dwelling until the original property is sold. (R & T section 69.5)

In a recent decision, the county rejected the taxpayer’s claim of exemption. That taxpayer was required by the lender to form an LLC to obtain the construction loan for the new residence, and the county said that the LLC is not a person, so the exception does not apply. The county was overruled.

In Wright v. County of San Mateo, The Wrights sold their residence in Belmont. They bought a parcel of land in Half Moon Bay, and were going to install a manufactured house and live there. During escrow to buy the property the lender told them that, in order to obtain a construction loan, they would be required to form an LLC to buy the property. After the manufactured house was installed the LLC transferred title to the lot Wright.

Wright then filed a request to transfer the base year value of the Belmont property to the Half Moon Bay property pursuant to section 69.5. The request was denied and plaintiffs filed an appeal with the county assessment appeals board. The board denied the claim, reasoning that because the lender “provided construction financing to the LLC” and the “LLC was issued a building permit” for installation of the home on the lot, the LLC constructed the replacement dwelling within the meaning of the statute. Wright filed this action for a refund of property taxes paid after the appeal was denied.

Wright argued that while the LLC obtained the construction loan, plaintiffs also contributed personal funds to both the purchase of the lot and the purchase and installation of the manufactured home. They paid $ 675,000 for the Lot and the manufactured home was assessed by the county at a value of $ 450,000. The LLC in the course of building the property incurred $380,000 in construction debt and $249,316 in land debt. Plaintiffs paid the balance of the land and construction costs personally.

The Court of Appeal agreed with Wright. The county tax board had reasoned that, despite Wright’s financial contributions and personal effort, they did not have a “formal or legal role” in the construction. But In reviewing section 69.5, (applicable portion set out below), the court of appeals noted that statute requires only that they own the replacement home “at the time of claiming the property tax relief.” It does not require that they own the lot during construction. The LLC did not own it when the exemption claim was filed, Wright owned it. The statute has a boatload of restrictions, so there is no justification to add any more.

Revenue & Tax Code section 69.5:

Under subdivision (a)(1), “any person over the age of 55 years … who resides in property that is eligible for the homeowners’ exemption under subdivision (k) of Section 3 of Article XIII of the California Constitution and Section 218 may transfer, subject to the conditions and limitations provided in this section, 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 ….” (Italics added.)
A “person” eligible for transfer under section 69.5 “means any individual, but does not include any firm, partnership, association, corporation, company, or other legal entity or organization of any kind.” (§ 69.5, subd. (g)(11).)

The term “newly constructed” is defined in relevant part as “Any alteration of land or of any improvement, including fixtures, since the last lien date that constitutes a major rehabilitation thereof or that converts the property to a different use.” (§ 70, subd. (a)(2).)

A “replacement dwelling” is “a building, structure, or other shelter constituting a place of abode, whether real property or personal property, that is owned and occupied by a claimant as his or her principal place of residence, and any land owned by the claimant on which the building, structure, or other shelter is situated.” (§ 69.5, subd. (g)(3).)

In addition to meeting the requirement of subdivision (a), “any person claiming the property tax relief provided by this section” must also, among other things, “[a]t the time of claiming the property tax relief … [be] an owner of a replacement dwelling and occup[y] it as his or her principal place of residence.” (§ 69.5, subd. (b)(4).)

Photos:
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