? about property tax

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autox_IHB

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How are property tax assessment made when a property is sold for much lower than market value, such as between family members?



Lets say a parent have a home that's worth 500k. But "sell" it to a child for 100k. Will the property tax be base on the new sale price of 100k?



Thanks.
 
[quote author="autox" date=1250050594]How are property tax assessment made when a property is sold for much lower than market value, such as between family members?



Lets say a parent have a home that's worth 500k. But "sell" it to a child for 100k. Will the property tax be base on the new sale price of 100k?



Thanks.</blockquote>


That's a very good question. If one was to do this clandestinely, now would be the time, since prices are all over the map and falling-easier to disguise such a sale now than during the bubble.



I'm very curious as to what the answer would be. Also, would the IRS treat the difference between actual sale price and free market value as a gift for tax purposes?
 
If it's between parents and kids, it is gift-able. If it's brother and sister I do not think you can give such a large gift. There is a limit to the amount one can give to their child. I believe for 1 parent it is 250,000. Try speaking to an attorney who handles living trusts.
 
I will get a definitive answer to that this evening and post later. I'm off to see my wills/trusts/estate lawyer, otherwise known as my mother-in-law right now.
 
I'm more interested in the property tax aspect versus the IRS gift/estate side.



Theoretical situation:

You have John who bought a house at peak bubble and paid 1 mil. So he's currently paying property tax at one mil. Can he sale it to a friend for 300k who sale it back to him for 300k, so that now he only have to pay property tax at 300k?



What if the property is worth now worth 500k, does that make a difference?
 
[quote author="autox" date=1250068755]I'm more interested in the property tax aspect versus the IRS gift/estate side.



Theoretical situation:

You have John who bought a house at peak bubble and paid 1 mil. So he's currently paying property tax at one mil. Can he sale it to a friend for 300k who sale it back to him for 300k, so that now he only have to pay property tax at 300k?



What if the property is worth now worth 500k, does that make a difference?</blockquote>


No, he will not have a tax base on $300k. He will have a tax base on whatever the assessor believes the value is, and if that value is $500k, then the tax base would be based on that. Property taxes are based on the land value and the improvements or value/cost of the structure. If the improvements were valued at $300k, then the land would have to have a value of $0 in order for the tax base to be on $300k. I don't think there is any land valued at $0 in OC, Riverside yes, but OC no.



If it were a parent selling or gifting it to their kid, then it is a whole different story. There are ways to transfer the parents lower tax base due to prop 13 to the kid, but this would also mean they bought it years ago and the value of the property has now exceeded the increase in property tax rate. I.E. if they bought it for $100k 30 years ago, and now it is worth $500k, the tax base would be roughly based on $200k. However once the parent does this, they no longer can transfer their lower tax base to another property in CA.
 
Just got home from the in-laws, as you might expect, she said exactly what Graphrix said. It is obviously much different when it is between family members, the same rules do not apply to selling it to a friend. The original tax base for the parents is really the key.
 
[quote author="zubs" date=1250058312]If it's between parents and kids, it is gift-able. If it's brother and sister I do not think you can give such a large gift. There is a limit to the amount one can give to their child. I believe for 1 parent it is 250,000. Try speaking to an attorney who handles living trusts.</blockquote>






The lifetime gift tax exemption (per spouse) is $1,000,000.
 
[quote author="graphrix" date=1250074207][quote author="autox" date=1250068755]I'm more interested in the property tax aspect versus the IRS gift/estate side.



Theoretical situation:

You have John who bought a house at peak bubble and paid 1 mil. So he's currently paying property tax at one mil. Can he sale it to a friend for 300k who sale it back to him for 300k, so that now he only have to pay property tax at 300k?



What if the property is worth now worth 500k, does that make a difference?</blockquote>


No, he will not have a tax base on $300k. He will have a tax base on whatever the assessor believes the value is, and if that value is $500k, then the tax base would be based on that. Property taxes are based on the land value and the improvements or value/cost of the structure. If the improvements were valued at $300k, then the land would have to have a value of $0 in order for the tax base to be on $300k. I don't think there is any land valued at $0 in OC, Riverside yes, but OC no.



If it were a parent selling or gifting it to their kid, then it is a whole different story. There are ways to transfer the parents lower tax base due to prop 13 to the kid, but this would also mean they bought it years ago and the value of the property has now exceeded the increase in property tax rate. I.E. if they bought it for $100k 30 years ago, and now it is worth $500k, the tax base would be roughly based on $200k. However once the parent does this, they no longer can transfer their lower tax base to another property in CA.</blockquote>


Normally, houses are reassessed at the purchase price. If that's lower than what the assessor previously thought the property was worth, taxes are still lowered to the purchase price. Of course, this should only apply in hands off transactions between unrelated parties-the question is what happens if the transaction is between related parties? Will the assessor catch the fact that it was sold to related parties at a discount, or will they still automatically lower it to the purchase cost?
 
Parent-Child Transfers (R&T Section 63.1)





Real estate that is transferred from parent(s) to child(ren), or from child(ren) to parent(s) may be excluded from reassessment





The established Prop. 13 taxable value is not affected by the transfer



The new owner's taxes are calculated on the established Prop.13 value, instead of the current market value when the property is acquired.



$1 million limit (taxable value) on transfers of non-principal residence property



No dollar limitation on the original owner's principal residence



Generally, transfers between legal entities (i.e., corporations, partnerships) that are owned by parents or children do not qualify
 
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