Category Archives: Property Tax

AVOID FAMILY LITIGATION OVER WILLS

California, Living Trust, Mediation, Prop 13, Property Tax, Real Estate, , , ,

Doesn’t it seem like a rule? You hear about how families seem to get along when the patriarch of matriarch is living, but after they pass away, the claws of the nasty people come out from behind their once humble masks.

For you who never experienced legal actions against family before and it sounds like a great idea to put some muscle into what you perceive as your insecure position, you better beware.

Once you file a lawsuit or even threaten to file a lawsuit, you are making gross overtures and risk opening of a can of pandora.

If you’ve never had to deal with a person with a plaintiff mentality, and they decide to go legal on you, what could have been an amiable discussion between two adults or two parties, becomes a very expensive in-your-face game of “telephone operator”.

It would not surprise me if the plaintiffs were unable to count their own legal costs before their belligerent attitude gets the best of them. It must sounds good to bully someone and have an attorney agree with you and think you can “win”.

Attorney’s that take on the attack-the-family case have zero concern about any scorched earth policy, they only need to gain the plaintiff’s confidence, which is easy. Clients pay them for the exercise and force family to spend precious time and resources to fight.

Once threats of legal actions begin, communication from your own attorneys are laced with warnings to their clients of, “Do not interfere with this legal process or you will jeopardize the proceedings.” As the defendant, you feel isolated and your hands are tied as tensions rise.

The natural result is exacerbated family distrust. You didn’t think family trust was good beforehand, but because of someone’s inability to approach a family matter as gentlemen would, just makes it all worse.

Going legal on your family member is like declaring war with a ballistic missile, once you launch it, you can’t call it back.

I suggest other family members who have any influence, attempt to talk sense into their family members who are litigious. I know, good luck.

***

How to Resolve this?

I believe that the terms of a parent’s will or trust involve disclosure beforehand so that their are no surprises among heirs; however, this is ultimately the decision of the grantor whose owns the living trust.

One, if at all possible, in order to maximize any benefits from California PROP 13, specific real estates should be given to specific heirs so that each owns an entire property, or make it so that as few heirs as possible combine on properties to minimize title consolidation possibilities.

It’s usually not specified, however, given the ultra generic way most trusts are written and how little forethought goes into most trusts, some added authority should be given to the trustee who might need to implement and execute a previously unspecified plan especially if the desired plan is not to liquidate the entire estate in favor of cash.

The average real estate education of most people does not rise to the level of a landlord or an investor, so some extra communication may very well be required for those who are hard up for cash only inheritances and know neither ability very well.

In other words, the trustee ought to be given the power to exercise a plan that is created once execution is required to distribute the estate in an reasonably impartial manner and the execution of that plan must be given protection from impatient heirs.

I am NOT a lawyer, so you will need to hash out any concerns with your trust attorney, but my thought is this: Add a clause in your trust that will eliminate any heir or their descendants or their dependents of all rights to any percentage of inheritance from the estate if they threaten any belligerent legal action.

However, in effort to work out any disputes in a gentlemanly fashion, list 2 to 3 mediators ahead of time, they may be respected family members with good judicial sense or better, a legal professional who is willing to be a good official in helping settle disputes. Add that you expect that any disputes are mediated by them, or an official by mutual agreement. It would like adding an agreement to all parties to seek mediation while avoiding expensive and a painful adversarial legal actions and conflict.

If this is concept is legally feasible to be placed into a trust, then you would want to have heirs place these protections into their trusts, and make it inviolate, so that heirs down the line with litigious aspirations do not get out of line.

In Summary

Basically, it’s hard enough to deal with a loss of a loved one, so you want any law firm thinking about taking a side against the estate to say, “No way we want to take your case, you will only be eliminated from this person’s will.”

If there is a better way to implement this, so be it.

It’s not that there will not be disagreements between family members in the execution of the distribution of an estate, I believe, between parties where the intent is not nefarious and in reasonable exercise of the duties of a trustee or executor, that mediation be promoted and legal action be strongly dissuaded.

Good luck.

Copyright © 2023 TeamBetterLiving.com  All Rights Reserved

REVERSE 1031 vs PROPERTY TAXES – BEWARE

California, Investment, Prop 13, Property Tax, Proposition, Real Estate, Taxes, , , , , , , , ,

Planning on consolidating title on an investment property and involving a Reverse 1031 in the process?

For those of you who understand the value of California’s Proposition 13 you may conclude in your tax planning that your portion of a long-held multi-owner investment property is protected from reassessment when you need to consolidate to yourself a portion of the property.

Just a refesher, 1031s only deal with investment properties or properties intended to be used for investment purposes. In general, 1031s are a means by which capital gains from an investment property sale may be deferred as long as they are reinvested into another investment property.

If you are planning to execute a Reverse 1031, then please consider the following info and be aware not only the capital gain benefits but of the potential property tax consequences. The State of California does not look at your escrow transaction as only one property transfer, it will see it as two re-assessable transfers even though it is only in a single escrow.

Let me try to explain this mess that took me awhile to figure out.

In a Reverse 1031, an LLC title holder, which is under the responsibility of a 3rd party neither the buyer nor seller, must be created to hold the title from the consolidation sale until such time the buyer can release the title with funds from another investment property sale.

Here’s the basic difference: A Forward 1031 LLC holds funds. Reverse 1031 LLC holds title (waiting for funds to release it). Property tax doesn’t figure into moving funds between title holders, but it does involve itself with transferring title between separate title holders.

As just a regular tax paying citizen (I am not a real estate professional and I am not a legal professional), the best I can tell, having argued extensively with my County and inquiring to the State Board of Equalization, Reverse 1031s fall within a loophole that gives the State the opportunity to assess your property twice for the percentage of title transferred.

Again, although it may be your intention to consolidate a percentage of an investment property from a co-owner, the necessary deposit of the title into an LLC created by the Reverse 1031 will create two title transfers and interpreted that way by the county (although it is only one escrow).

If within a Reverse 1031 you are transferring a very small portion of the property’s title, the property tax consequences may be insignificant.

However, if you are changing hands of equal shares of the property, presuming the co-owners hold significant percentages, you will be reassessed for an amount that is two times greater than you would normally expect. In simple math, if the seller held 25%, in a Reverse 1031 the county will reassess the property for an equivalent of 50% of the title changing hands based on the market value.

Important note: An assessor in California will reassess the percentage of un-excluded* (see note at bottom) title transferred every time it transfers. In certain transfers, the reassessment may be subject to a legal exclusion, such as parent to child (but not sibling to sibling).

Your situation may be this: Due to pressure from the selling party to expedite the deal, you may be put into a position where you may need to adopt a Reverse 1031 to preserve your capital gain deferring strategy.

Unlike a Forward 1031 where the funds are held from a previously sold investment property and would be used to purchase, in this case, the portion of property to be consolidated, a Reverse 1031 requires non-1031 cash up front, to purchase the property. The seller benefits being able to put the deal behind him while the buyer holds the bag until he can release the consolidation title from the LLC holder using funds from a not-yet-sold investment property.

If a Forward 1031 can be used, the funds held in the LLC holder may be used to purchase the seller’s portion directly and the consolidated title does not have to transfer in and out of an LLC holder. In a Forward 1031, funds, not a title, from a relinquishing property sale are held in LLC.

In other words, in the Forward 1031 situation the consolidated title is not reassessed two times**, because the title is only transferred once and that is directly to you, not through the LLC.

Legally, it seems the crux of the problem lies in, despite the fact that the whole intention of the escrow is for the seller to transfer title to the seller, in spirit, a single transaction, the Reverse 1031 process introduces a bug that is exploited by state and county government, thereby overriding the spirit of protection offered by Proposition 13.

In other words, in using a Reverse 1031 in California, unless there is a successful legal challenge to this practice, expect to have the same title reassessed twice in one act of consolidating. Furthermore, were you to completely consolidate the property to your name, using a Reverse 1031 anywhere in the process, you could end up in a situation where the previous property tax basis that you have enjoyed no longer exists in any percentage.

A 1031 officer can provide a petition that describes the intent of the Reverse 1031 LLC as only a temporary holder, but good luck in trying to convince the county that they ought not to reassess a title transfer that is not specifically excluded in their checklists (i.e. parent to child).

It may be worth your time to explore some alternatives with an experienced and knowledgable 1031 officer well-versed in Forward and Reverse 1031 options.

As a final thought, if a Reverse 1031 becomes applicable in your real estate situation, once substantial long term property tax consequences and the personal sacrifice via losses due to the increased liabilities are understood, they ought to be considered by all parties involved.

Disclaimer: The information in this article is based on the author’s personal opinion and is not intended to be legal advice. The author is not a tax professional, real estate professional or other law professional and the information in this article shall not be construed in any form to be a substitute for certified licensed professional advice.

*Note: You will need to determine which transactions are legally excluded from title transfer reassessment in your county and/or state.

**Note: Ensure in your Forward 1031 process that the title is not transferred into an LLC. Discuss and confirm this detail to legal certainty with a certified 1031 officer.