Friday, January 10, 2014

Tax Benefits for Your Domestic Partner

Today's guest blog is from Casey C. Verst, and applies to California law. But it is an interesting example of little-known real estate law that may save you big dollars in taxes, and well-worth researching in your own state. What follows is a description of the current California tax laws pertaining to domestic partnerships.

If you live with a significant other and you aren’t married, or even if you live with a friend, sibling, or more distant relative, you may qualify for a new property tax reassessment exclusion that became effective on January 1, 2013. Under this new law, if “cotenants” own 100% of a property together as tenants in common or joint tenants and use it as their principal residence for at least a year, and one cotenant transfers his or her interest to the other cotenant upon death (e.g. through a will or trust), then that transfer is excluded from real property tax reassessment.
Even though the law was aimed to protect unmarried elderly and same sex couples, two aspects of the law open the door for additional estate planning opportunities: first, the ownership does not have to be 50/50, and second, the cotenants do not have to be in any kind of relationship (I’ll spare you the constitutional law lecture, but the legislature couldn’t have written the law to apply only to elderly and same sex couples or they would’ve likely had a constitutional problem). Because the law is broadly written, friends and relatives who live together can benefit from this new exclusion as well. For example, if you and your sister (or a friend) live together in a house which she owns 99% and you own 1%, and your sister passes away leaving you her 99% interest, you will not pay a penny more in property taxes by reason of that transfer. Before this law came into effect, the transfer of the 99% interest from your sister would have been reassessed to the value as of her date of death, because a transfer between siblings would not otherwise qualify for an exclusion from property tax reassessment.
Here is where the potential estate planning opportunity arises: if instead your sister owns 100% of the residence that you both live in and she plans to leave you the house, the estate planning move to contemplate is for your sister to gift a small percentage of the property to you now, because if she dies owning 100% of the property and leaves it to you, the entire property is still subject to reassessment under current law.  If she purchased the house twenty or thirty years ago, the new property tax bill (resulting from her death) might be so burdensome that you would have to sell the house. However, if at least one year prior to her death your sister gifted a 1% interest to you (by a recorded Deed), under this new law the 99% you receive would be excluded from reassessment. (Note that the gift of a 1% interest would be reassessed now if there is no other applicable exclusion).
Of course, property tax is only one of many considerations in estate planning, and you should consult an estate planning lawyer before making any decisions. This law is just another example of why you should revisit your estate plan every few years to make sure you are taking advantage of any new laws.
 Happy Investing!

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