Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I’m thinking of converting a barn into a residence in California. What would I be looking at in taxes?
“Converting can have significant tax consequences,” said Matthew F. Burke, principal of his eponymous law practice in Los Angeles.
After the conversion, “the property will be reassessed for property tax purposes and as a result, property taxes will go up,” said Betty J. Williams, managing shareholder of Law Office of Williams & Associates in Sacramento, California.
In California, a property’s tax rate is determined by its “base year value,” the value of the land and improvements combined, Mr. Burke said. Changes to the base year value occur only due to inflation —a maximum of 2% annually—and when ownership changes or new construction takes place, he said. A barn conversion would fall into the last category, he added, because the end result would be “substantially equivalent to new.”
The land value shouldn’t change, unless there is significant physical alterations, such as leveling, site preparation and foundation excavation, he said.
With the higher assessment comes higher property taxes.
However, “there is no immediate income-tax effect on the conversion,” Ms. Williams said.
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