In recent years, I have noticed a couple of related trends in my real estate law practice with regard to transfer taxes and property tax reassessments. First, county tax assessor’s offices and recorder’s offices have become more aggressive with the transfers they characterize as taxable events, in an apparent effort to augment their counties’ bottom lines. Second, in a clear response to these efforts, property owners have become more focused on methods to mitigate their transfer tax and real property tax obligations. As a result, I am asked more and more often to assist clients with property tax reassessment and transfer tax matters.
Most attorneys are familiar with the property tax and transfer tax exclusions that apply to title transfers that occur regularly in their specific fields. For example, family lawyers are aware of the exception for transfers between spouses. Similarly, estate planning attorneys are conversant with the parent-child transfer exclusion, among others. As most lawyers are not well acquainted with all of the real property tax and transfer tax rules governing title transfers and exceptions, however, it is useful to take a closer look at these exemptions from time to time.
One situation in particular in which exemption issues can arise is when legal title to real estate is held in a different name from its beneficial owner (i.e., the owner of the rights and responsibilities for that real estate as a matter of fact). These arrangements may come up in a variety of contexts. For example, family members may agree that it is better to put real estate in the name of a more responsible relative while allowing other relatives to manage and operate the property. Or a developer may wish to acquire real estate without disclosing its interest to the public at large by having title to the property put in the name of a trusted colleague, while otherwise assuming all legal obligations for the property. (NB: Such agreements may not pass muster under legal scrutiny by certain authorities; attorneys should not advise their clients to enter into these transactions unless they can provide substantial caveats.)
From time to time in these circumstances, the holder of legal title to property and the beneficial owner of the property will wish to transfer legal title to the property into the name of the beneficial owner. In the first instance described above, this may occur when the relatives who are managing and operating the property demonstrate that they are responsible enough to be placed on title to the property; in the second case, this can happen when the developer must disclose its interest in the property in order for a development project to proceed. If legal title to real estate is transferred by deed from the titleholder to the beneficial owner, what are the implications of that transfer for property tax reassessment and transfer tax purposes?
The good news is that there is legal authority to support the position that such transfers do not trigger property tax reassessment and transfer tax, as long as no value is being exchanged by the parties to the transfer. Conveyances given solely for the purpose of perfecting title in the beneficial owner’s name, which thus results only in a change in the manner of holding title, are exempt from transfer tax under California Revenue & Taxation Code Section 11925(d). Similarly, California Revenue and Taxation Code Section 62(a)(2) states that transfers that result solely in a change in the method of holding title to the real property, where the percentage ownership interests are unchanged (e.g., perfecting title in the beneficial owner’s name), do not trigger reassessment for property tax purposes. As such, owners of California real estate do not have to be over-concerned about the tax impacts of combining their legal title and beneficial ownership of property in the event that those interests are divergent.
The not-so-good news is that property owners in these situations will likely have to jump through a number of hoops to ensure that their transfers enjoy exclusion from property tax reassessment and transfer tax. With regard to transfer tax, different county recorders can require varying documentation to support this claim of exemption, which can potentially result in a delay in the recording of the deed. County assessors are also reluctant to allow this claim of exemption from reassessment without serious scrutiny, and will generally ask to review the supporting documents for these beneficial ownership arrangements before granting the exemption. (NB: Where the property in question is mortgaged, title transfers may also trigger acceleration of the loan; in this state of affairs, beneficial owners need to be prepared to repay the loan as soon as title has been perfected.)
While most owners of real estate who have inconsistent legal title and beneficial ownership interests got into this position without the benefit of legal counsel, extricating themselves from these conditions will be best accomplished with the expert assistance of competent counsel to help ensure that they avoid the pitfalls that can befall them if not handled properly.