Editor’s note: Meet Tara-Nicholle Nelson at the upcoming Real Estate Connect conference in San Francisco, which runs from Aug. 5-7, 2009. She will be available to meet with conference attendees from 12:30 p.m. to 1:30 p.m. on Thursday, Aug. 6, in the Palace Hotel’s Ralston Room. Click here to send Tara-Nicholle a message.
In the case Phelps v. Orange County Assessment Appeals Board No. 1, a leased shopping center was held in trust, with Phelps as the income beneficiary of the trust. On Phelps’ death, his interest as the income beneficiary of the trust passed to his four children. On this transfer, the Orange County Tax Assessor reassessed the value of the property and increased the property taxes. The trust appealed the property’s reassessment to the Assessment Appeals Board, but the appeal was denied.
At trial, the court denied the children’s petition to overturn the board’s ruling, on grounds that the transfer of the income beneficiary interest did qualify as a "change in ownership" under Revenue and Taxation Code section 60, thus warranting reassessment.
The Court of Appeal upheld the lower court’s ruling. Under Section 60, a reassessment-triggering "change in ownership" is "a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest."
The court found that although the buildings on the property were constructed by the tenants, the children have a present interest in the property because the lease requires the tenants to surrender the buildings to the trust in good condition at the end of the lease. The children’s use of the property was beneficial, the court opined, because they receive income from it, despite the fact that they do not hold an ownership interest in the property.
Finally, the court explained, because a beneficiary entitled to income from a property for life is deemed by law to have an interest substantially equal in value to an ownership interest in the property, when the children became lifetime beneficiaries, that transfer was a change of ownership and did trigger reassessment under Section 60.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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