For the third year in a row, the state has added an exception to the uncapping rule. The usual rule is that when title to real property changes hands, the “taxable value” is uncapped, increasing to match the “assessed value”, sometimes greatly increasing property taxes for a property. Between such transfers, the TV can only increase by the rate of inflation, up to 5%. If property values rise faster, the TV lags behind the AV.
The State Tax Commission has been stingy, rejecting many claims to the exceptions from uncapping. And the Legislature has been equally promiscuous, expanding the exceptions far beyond what voters approved in Proposal A in 1995. In the last two years, the Legislators expanded the exceptions to avoid uncapping if property is transferred to certain qualified relatives (kids, parents, sibs), and not used for commercial purposes after the transfer. The STC then changed its published Guidelines to state that the TV would still uncap upon the expiration of a life estate, even if the property goes to one or more qualified relatives. The Legislature has now responded to directly counter that. Now, if mom deeds the cottage to the kids, reserving the right to use it during her lifetime (which is what a life estate is), when mom passes, the kids get the cottage without the TV going up, again subject to the requirement that the property cannot be used for “any commercial purpose” following the transfer. For a lakefront cottage held in the same family for a long time, the property tax savings can be huge—provided the family does not use the cottage for any commercial purpose. Rich families benefit; those who lease out the cottage some weeks to generate money to pay the tax bill may run afoul of the bar on use for any commercial purpose—it is not at all clear how many such rentals would result in the loss of the exception from uncapping.
Many of us have advised clients to use “Lady Bird Deeds” to transfer real property upon death. It leaves the person in control during his or her lifetime while not requiring probate or a trust. I have, though, warned that the STC Guidelines indicate that the TV will uncap upon the expiration of a life estate even if the “remainder” owners are qualified relatives so not to use a Lady Bird Deed if the family planned to keep the property in the family. Now it appears Lady Bird Deeds can be used even then, subject to that caution about any commercial use.