Long-Term Leases and Property Tax Reassessment in California
Property Tax Resources, LLC
At PTR we believe that property tax consulting should be based on a deeply embedded relationship with our Clients.
California's property tax system, governed by Proposition 13 and the California Revenue and Taxation Code, includes specific provisions for when property tax reassessments occur. Here we explore the rules surrounding long-term leases, focusing on the conditions that trigger property tax reassessments when such leases are created or terminated as well as how long-term leases can be used in strategic planning.?
?
Property Tax Reassessment
Under Proposition 13, property tax assessments in California will generally only increase by 2% per year. However, a property can be reassessed to its current market value upon a "change in ownership" or completion of new construction.? It is important for taxpayers to understand the implications of long-term leases and the impact they may have as a “change in ownership”.
?
When Long-Term Leases Trigger Property Tax Reassessment
Creation of a Long-Term Lease: When a long-term lease (35 years or more) is created, it can trigger a property tax reassessment. According to California Revenue and Taxation Code Section 61, a long-term lease is considered a change in ownership, thus necessitating a reassessment of the property's taxable value.
-????????? Lease Terms and Impact: The specific terms of the lease, such as the length and the rights transferred to the tenant, play a crucial role. Property owners and tenants need to be aware of the potential impact of the reassessment.
?
Terminating a Long-Term Lease: Similarly, termination of a long-term lease can also trigger reassessment. According to California Revenue and Taxation Code Section 61, when a lease of 35 years or more is terminated, the property reverts to the original owner, which is considered a change in ownership, and a reassessment may occur.
-????????? End of Lease Considerations: Property owners and tenants must be aware of the potential tax implications when a long-term lease ends. This can impact financial planning and budgeting for both parties.
?
Protection from Reassessment on Property Sale
Tenant Protection: Long-term leases may provide tenants with protection from property tax reassessment when the property owner sells the property in certain circumstances. If the lease remains in effect with greater than 35 years of remaining term, the tenant's rights and obligations continue unchanged, and the property subject to the long-term lease may not be reassessed for tax purposes. This is because the long-term lease is considered a continuing interest in the property, and the sale of the property does not constitute a change in ownership that would trigger reassessment.
?
Practical Implications and Strategies
领英推荐
For Property Owners:
-????????? Strategic Lease Agreements: Property owners can use long-term leases strategically to manage property tax implications. By understanding the conditions under which reassessment occurs, owners can plan leases and sales to minimize tax increases.
-????????? Lease Termination Planning: Owners should plan for the financial impact of reassessment when a long-term lease terminates and consider negotiating lease extensions or modifications to mitigate tax consequences.
?
For Tenants:
·???????? Stability and Cost Management: Long-term leases provide stability and predictability in property tax expenses, as tenants are shielded from reassessment if the property is sold in certain circumstances.
·???????? Lease Negotiation: Tenants may be able to negotiate lease terms that ensure protection from reassessment and consider the potential long-term tax benefits of a lengthy lease.
?
Understanding the rules surrounding long-term leases and property tax reassessment in California is crucial for both property owners and tenants. By recognizing the triggers for reassessment and the protections afforded by long-term leases, parties can make informed decisions that optimize their financial outcomes.
?
At Property Tax Resources, LLC, we believe that property tax consulting should be based on a deeply embedded relationship with our clients. Our goal is to align ourselves completely with our client’s objectives and to deliver the results they are seeking. We are a team of seasoned professionals with the necessary expertise to produce exceptional results across the country. Visit our website for more information:
?
Property Tax Resources, LLC
?
#PropertyTaxAssessments #35YearLease #LongtermLease #CaliforniaRealEstate #LeaseAgreements #PropertyManagement #Leasehold #RealEstateTax