How to transfer property in California & still be protected under Prop 13


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Proposition 13 was enacted in California in 1978 to limit the amount of property taxes that homeowners pay. Prop 13 protects your property taxes from increasing by more than 2 percent per year. It protects properties that rise in value as well.

What follows are guidelines on how to deal with the biggest concerns mortgage borrowers have when it comes to keeping property taxes low:

I want to buy my family a home, but I cannot afford current market property taxes. How can I buy the house and keep my mortgage payment ultra-low?

Prop 13 protects change of ownership among certain family members, such as spouses, domestic partners, parents, children and grandparents. Aunts, uncles and other relatives do not count, and any property transferred among those individuals will cause a reassessment in the value of the current purchase price.

I want to buy the house from my family for what they owe on it.

This doesn’t always work out that way. Here’s why. 

Let’s say there’s a $300,000 mortgage on the property, and your parents agree to sell you their home for that amount. There still needs to be an equity position, and there’s also closing costs to consider. Remember that less equity results in a higher mortgage payment, prompting the need for private mortgage insurance (PMI). 

Additionally, there are closing costs to consider, including title insurance, notary fees, title fees, etc. In such a scenario, if your folks don’t want to net any money by selling the property to you (and they’re going to essentially sell you the property for what they owe on it), you would have to pay the down payment of at least 3.5 percent and the closing costs. Or, you may have to pay the down payment amount while the closing costs would be added to the amount owed on the property.

I can’t qualify at current property tax rates. How do we make sure to use the lower taxes in the mortgage process?

Not all mortgage companies recognize the change of property tax ownership. But, though it doesn’t always happen, property transfers among family are sold for substantially below the current market value. As such, the property taxes are based on the purchase price.

So, for example, let’s say that your family is selling you an $800,000 house for $500,000 (sounds crazy, but it happens). The property taxes would be $833 per month (or $10,000 per year). After the fact, you would fill out a form with the county assessor stating that the property changed hands among immediate family owners. You’d thus be protected under Prop 13.

Does adding or removing somebody from title cause the house to be reassessed?

Not unless there is a complete change of ownership. However, there are property taxes that come up in the form of transfer taxes by shifting people from the title to the property. 

Contact a lender who understands how these regulations work in the context of family transfers.

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