Due to a new law that took effect on December 31, 2013, it’s now possible to pass residential property to certain relatives without increasing the tax burden on them. This law essentially allows property to be kept in a family longer because the future generation will pay the same level of property tax that the original owner enjoyed.
Prior to this legislation, a transfer of ownership (like a transfer to a relative such as a parent to a child) would likely result in the “uncapping” of property taxes. Uncapping allows the local assessor to step up the value so that the new owner has a much larger tax bill. For certain properties that have appreciated in value for a number of years, this tax increase can be significant—double, triple, or even 10 times higher than the existing bill in some cases. So significant that some owners have even sold their property during their lives because they didn’t think the next generation could afford the property taxes upon an uncapping. With the proper planning, this new exemption can preserve the tax rate when the property is transferred and allow it to stay in-family.
In simple terms, common transfers like one between a parent and child meet the requirement. However, there are many issues to consider and the State Tax Commission has recently added to the complexity. Among many other issues it addressed, the Tax Commission indicated that a change in the property’s “use” triggers an uncapping.
If you’re considering passing property to the next generation, be sure to consult an attorney who specializes in this area and who can provide you with direction on whether a transfer can qualify for this exemption.