By Cynthia Wu 

Reassessment and Change of Ownership

• Regular transfer

A “change in ownership” means a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest (RTC § 60).

1. a present interest in real property
2. including the beneficial use
3. value of which is substantially equal to the value of the fee interest

 triggers reassessment.

 For further details, please continue read.

• Tenancy in common

Except as otherwise provided in RTC§62, change in ownership, as defined in Section 60, includes, but is not limited to:

RTC§61(f) The creation, transfer, or termination of any tenancy-in-common interest, except as provided in subdivision (a) of Section 62 and in Section 63 (interspousal transfer).

Therefore, the portion of the property involved in the transfer is subject to reappraisal.

• Jointtenancy

What we are focus on would be RTC § 65 where the statute says: Upon the termination of an interest in any joint tenancy described in subdivision (b), the entire portion of the property held by the original transferor or transferors prior to the creation of the joint tenancy RTC § 65

(a) …Upon a change in ownership of a joint tenancy interest only the interest or portion which is thereby transferred from one owner to another owner shall be reappraised.

(b) There shall be no change in ownership upon the creation or transfer of a joint tenancy interest if the transferor or transferors, after such creation or transfer, are among the joint tenants…

(c) Upon the termination of an interest in any joint tenancy described in subdivision (b), the entire portion of the property held by the original transferor or transferors prior to the creation of the joint tenancy shall be reappraised unless it vests, in whole or in part, in any remaining original transferor, in which case there shall be no reappraisal…

(d) Upon the termination of an interest held by other than the original transferor in any joint tenancy described in subdivision (b), there shall be no reappraisal if the entire interest is transferred either to an original transferor or to all remaining joint tenants, provided that one of the remaining joint tenants is an original transferor.

In our scenario, RTC § 65(c) is applicable. When one party buys out the other party’s 100% interest, it essentially terminates the selling party’s interest. Whether this transaction triggers reassessment hinges on the vested nature of the interest.A vested right or interest in property is one that is secure, guaranteeing that the beneficiary will receive a specific amount, either immediately or in the future. If the interest is vested, then there will be no reassessment. However, if the interest is not vested, the entire portion of the property held by the original transferor(s) prior to establishing the joint tenancy will undergo reappraisal. Therefore, it’s crucial to determine the vested nature of the interest to understand whether a reassessment will be triggered under RTC § 65(c).

Also, the amended Property Tax Rule 462.040 specify that:

(a) GENERAL RULE. The creation, transfer, or termination of a joint tenancy interest is a change in ownership of the interest transferred.

Example 1: The purchase of property by A and B, as joint tenants, is a change in ownership of the entire property.

Example 2: The transfer from A and B, as joint tenants, to C and D, as joint tenants, is a change in ownership of the entire property.

Example 3: The transfer from C and D, as joint tenants, to C, as sole owner, is a change in ownership of 50 percent of the property.

EXCEPTIONS. The following transfers do not constitute a change in ownership:

(1) The transfer creates or transfers any joint tenancy interest and after such creation or transfer all transferor(s) are among the joint tenants. Such a transferor who is also a transferee is, therefore, considered to be an “original transferor” for purposes of determining the property to be reappraised upon subsequent transfers.

Joint tenancy arrangements can be quite complex. Typically, when an interest in a joint tenancy ends, this change can lead to a reassessment of the property value for tax purposes, particularly for the portion that’s transferred. However, there’s an important exception to this rule: If the transfer either creates or changes a joint tenancy interest and all the original transferors remain as joint tenants after the transfer, then this situation is exempt from reassessment. Essentially, a transferor who retains a share as a joint tenant—in other words, is also a transferee—remains an “original transferor” in the eyes of the law.

Tax Implications for Different Transfer Scenarios

1）Regular Transfers (Non-Related Parties, No Gift Intent):

1. Transferor:
2. Capital Asset: According to IRC 1221(a), the term “capital asset” encompasses property held by the taxpayer, irrespective of its connection to trade or business activities. This definition excludes assets utilized in the ordinary course of trade or business, like stock in trade or property used in business operations. It also excludes property personally created by the taxpayer, such as patents, inventions, models, designs (patented or not), secret formulas or processes, copyrights, and literary, musical, or artistic compositions, along with letters or memoranda.

In a typical transaction, the transferee’s basis for the house is established under IRC 1012 (cost basis), meaning the new basis is generally the purchase price paid for the property.

1. Computation of gain or loss: Calculating gain or loss involves determining the difference between the amount realized from a property’s sale or disposition and its adjusted basis, as outlined in 26 U.S. Code § 1001(a). Specifically, a gain is calculated as the amount realized exceeding the adjusted basis, while a loss is the adjusted basis exceeding the amount realized.

Per IRC 1001(b), the amount realized is the total of any money received plus the fair market value of any non-monetary property received.

1. Limitation of loss: According to IRC 1211(b), for taxpayers other than corporations, losses from the sale or exchange of capital assets are deductible to the extent of any gains from such transactions. If these losses exceed the gains, the deductible amount is limited to the lesser of:

$3,000, or $1,500 for a married individual filing separately.

The amount by which the losses exceed the gains.

1. Transferee:

Transferee’s basis for house is determined under irc 1012 (cost basis),meaning the new basis is generally the purchase price paid for the property. According to irc 1012 (a) The basis of property shall be the cost of such property, but not include any amount in respect of real property taxes ( irc 1012 (b) ).

• Tenancy in Common and Joint Tenancy:
• Gift Tax and Transfer for Less Than Fair Market Value

Transferring property for less than its fair market value can be considered a gift, with specific tax implications under IRC 2512. For the transferee, such a transfer may affect the basis calculation of the house, even though the gift may not be included in gross income (26 U.S. Code § 102).

3) Refinancing and Reassessment– please visit https://assessor.lacounty.gov/real-estate-toolkit/refinance

The impact of refinancing on property reassessment can vary. Typically, the initial transfer involved in refinancing, such as adding or removing a name on the property title, may lead to a reassessment of the property’s value, unless specific exclusions apply to the individual transfer.

For instance, when refinancing necessitates removing an owner from the title, this action is usually interpreted as a change in ownership, prompting the property assessor to conduct a reassessment of the property’s value.

Conclusion

The transfer of real property, whether in the context of regular sale, tenants in common, joint tenancy or refinancing, carries intricate tax implications. Understanding the nuances of tax codes and reassessment conditions is crucial for navigating these financial and legal aspects effectively.

This is provided only for informational purposes and is not legal advice or a substitute for legal counsel. If you’re dealing with tax-related challenges or complexities related to property transfers, it’s advisable to seek expert guidance from Concord & Wisdom Law Group. Our team of attorneys, who hold advanced LLM in Taxation degrees and have accounting backgrounds, is well-prepared to offer effective assistance in these areas. To learn more or to arrange a consultation, please visit our website at www.attorneywu.com or reach out to us via email at info@attorneywu.com. Our experienced team is dedicated to ensuring that your tax-related concerns are managed with the highest level of expertise.

Disclaimer: Please note that the information provided here is intended to serve as a basic overview only. The practice of tax law is complex and cannot be effectively navigated as a do-it-yourself project. It is important to understand that no attorney can fully address all your concerns or questions without a personalized consultation to discuss the unique aspects of your situation.

We strongly encourage you to schedule a call with us to receive tailored assistance and guidance through the process.