Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: Do home ownership changes in the U.S. trigger a property tax reassessment and how can capital gains taxes be reduced?
The answer may be state specific and client specific, said Richard Roth III, founder and managing partner of Roth Law Firm in New Orleans.
"California is one of the few states that reassesses only when there is a change in ownership or there’s new construction," said H. Michael Soroy of Law Offices of H. Michael Soroy in Los Angeles. "Most states seem to reassess on a regular basis, from every year to every three to five years."
More:How Can I Tell if My Property Tax Bill in Greenwich, Connecticut, Is Correct?
Mr. Roth, who’s licensed to practice in Louisiana and South Carolina, said he generally would recommend placing the property into a limited liability company.
A property placed in an LLC probably "would not pass through the conveyance records of the parish or county where the property is located," Mr. Roth said. This could reduce exposure to a re-assessment of property taxes. It also could offer estate planning opportunities because LLC interests may be gifted annually to descendants, he said.
However, an LLC could diminish any reductions or property tax exemptions a municipality grants for a personal residence, Mr. Roth noted.
In California, for an LLC or a corporation holding a title, as much as 50% of the ownership in the entity may change without triggering reassessment, Mr. Soroy said. Also, parents and children in the state can transfer residential ownership to each other at any time without reassessment and with no cap on value, he continued.
Meanwhile, capital gains taxes —those paid by the seller on the profit from a home sale —must be paid on both federal and state levels. The average state capital gains tax is about 5% and may be deducted on the federal tax return, Mr. Soroy said. Most owners hold properties more than a year to realize any gain, he noted, and the federal capital gains tax is either 15% or 20% plus state capital gains tax, if any. Nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—don’t have capital gains taxes at all.
More:Click to Read Tax Experts Share Answers and Advice for Readers' Pressing Tax Questions
To avoid, defer, or minimize capital gains taxes on a residential property after a sale, Mr. Soroy said, you may:
Live at the property for at least two of the last five years of ownership. This will allow you to reduce your tax by as much as $250,000 (single) or $500,000 (married couple).
Inherit the asset at its stepped-up market value as of the date of decedent’s death, thereby avoiding any capital gains tax. There are no federal and very few state inheritance taxes.
Invest the gain in tax-deferred annuities, 401(k)s and IRAs.
Email your questions to editors@mansionglobal.com. Check for answers weekly at www.mansionglobal.com.