I’ve written elsewhere about the relationship between Propositions 13 and 8. To summarize, Proposition 13 limits
property tax increases to 2% per year. Thus, if property values rise 10% in one year, the assessed value will not increase more than 2%. Proposition 8 deals with the flip side of the coin –declining values. Under Proposition 8, if your property value declines, the assessed value declines to the reduced fair market value. There is no limit to the decline in value assessment. Thus, if the property value declines 10% in one year, the assessed value will decline 10%. Once you are under Proposition 8, your assessed value can increase the following year or years if the market value increases. Thus, if your assessed value is reduced 10% in Year 1, it can be increased 10% the following year if values rise. The only limitation to the increase is the original Proposition 13 limit. Because the original (and higher) Proposition 13 value is the only limit to increases following a decline in value assessment, there can be tremendous benefit to “locking in” your Proposition 8 value. How can you do this? Paradoxically, by purposefully triggering a transfer – something tax planners ordinarily spend a considerable amount of time avoiding. This can be done in any number of ways. For example, assume the property is owned by ACB, LLC and has two 50% members, D and E. ABC, LLC can do a non-proportional transfer to a new entity owned by D, 49%, E 49% and F 2%. This can be especially beneficial for estate planning purposes (e.g., entity owned by husband and wife transfers ownership to new entity owned by husband, wife and child). Or one of the members can transfer a 1% interest to F, thereby reducing their economic interest below 50%. Or, D can transfer economic or voting control to E by transferring a 1% economic or voting interest. There are many possibilities. If you property is in Proposition 8 status, you may want to consider them.
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blogHi. I'm Stephen Flynn. Attorney and founder of the Law Offices of Stephen M. Flynn. This is my blog. Enjoy! Archives
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