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.
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.