Partial Interest Transfers
Most transfers of real property involve the entire interest in the property going from one person or entity to another person or entity. Approximately 10% of real property transactions involve a partial interest transfer where one person or entity acquires a partial undivided interest from one or more persons or entities. When a partial interest transfer occurs, the assessor must calculate a blended value for the entire property as of the date of the partial interest transfer.
This blended value consists of the Proposition 13 factored base year value of the interests that did not transfer and the new, full cash value of the undivided interest that transferred. In many cases these partial interest transfers are between spouses or between parents and children and qualify for exclusion from reappraisal if certain procedures are followed.
Joyce D. and Frank L., who are neither spouses nor parents or children of each other, purchased a rental property for $200,000 in October 1992 as tenants in common on a 50/50 basis. The assessor enrolled their purchase price as the full cash value and established a 1993 Proposition 13 base year value of $200,000. In October 2003 Frank L. transferred his 50% interest in the property to Joyce D. They agree that Frank will get his original down payment back plus interest and that Joyce D. will take full responsibility for the outstanding mortgage. The 2003-2004 factored base year value of the property prior to the transfer as shown on the 2003-2004 tax bill is $239,406. This value represents the original purchase price plus the inflationary adjustments required under Proposition 13.
In March 2004 following the one-half interest transfer, Joyce D. receives a notice of supplemental assessment from the assessor showing a 2004 base year value of $ 321,938. This new value is composed of Joyce’s one-half of her 2004 factored base year value at $121,938 plus the new base year value of the one-half interest she acquired from Frank at $200,000. This new base year value for one-half the property was based on a full cash value of $400,000 as determined by the real property appraiser who works for the assessor using sales of comparable properties. In the view of the appraiser, the terms of the transaction between Joyce and Frank did not represent an arms-length transaction and thus did not represent full cash value. Joyce still retains the benefit of Proposition 13 protection for her original one-half interest, as the full value of the property if it had changed hands completely would be $400,000.
In a related matter, Joyce would pay transfer tax to the County Recorder on the deed by which Frank transfers his one-half interest to her. The tax would be based on the amount of the down payment with interest Joyce returned to Frank plus one-half of the mortgage obligation that Joyce took over from Frank. Joyce’s relieving Frank of responsibility for that amount of debt is considered as income and therefore is subject to the transfer tax obligation. If the down payment with interest after 10 years is $10,000 plus $10,000 in interest for a total of $20,000 and the remaining loan balance is $160,000 of which one half equals $80,000, then transfer tax would be due on $100,000 at the rate of $1.10 per thousand or $110.