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Rescission Deed

Overview for Rescission Deed

A “rescission” is a legal remedy used to extinguish a contract and to treat it as it never existed. It is basically an undo. How are rescissions useful for real property transfers?

In 1978, Proposition 13 was adopted by California voters to lock in the property’s market value at the time of purchase/transfer for property tax assessments (called the “base year tax value”) and limits the annual increase to the California Consumer Price Index (CCPI) or 2% per year, whichever is less (when the CCPI is accounted for, it is generally referred to as the “factored base year tax value”). This means a locked in taxable value that is usually far lower than market value which results in significant annual property tax savings.

However, when ownership changes the County Assessor may readjust the taxable value to the current market rate (called a “reassessment”). A reassessment may cause your taxes to increase exponentially.

Luckily there are several exclusions available to prevent reassessment. Some popular exclusions available are interspousal transfers, parent/child transfers, creation of joint tenancy, certain trust transfers, etc. With careful planning, reassessment can be avoided or deferred.

Some property owners transfer title to a non-exempt party and trigger a reassessment which causes their taxes to increase exponentially (sometimes up to 15 times). This is where a rescission is most useful.

Hypothetical Scenario: John purchased a home on August 7, 1979 in Pasadena, CA with a market value of $50,000.00. Under proposition 13, John’s base year value is $50,000.00 and is locked in for calculating his annual property taxes indefinitely.

Each year, the base year value will be increased slightly for inflation based on the California Consumer Price Index (CCPI) with a 2% maximum. With the CCPI adjustments made, the “factored” base year value for John’s property 36 years later on September 5, 2015 is only $94,237.00.

John’s realtor called him on September 5, 2015 and told him the market value of the property is about $1,150,000.00 if he decided to sell. John's annual property tax rate in Pasadena is 1.073947%. Therefore based on his 2015 factored base year tax value of $94,237.00, John’s 2015 annual tax bill is $1,012.06.

On September 1, 2015 John decided he was getting too old and transferred his Pasadena home to his younger sister Jasmine. Since there is no exclusion available from brother to sister, the sister has a new base year tax value of $1,150,000.00 which translates into an annual tax bill of $12,350.39. That is over a 12 time increase.

Both John and Jasmine did not know that this would happen and since John is living off social security and Jasmine is currently unemployed, they cannot afford the increased tax bill. Had John instead created a revocable trust which named Jasmine as the beneficiary, this reassessment could have been deferred.

Luckily there is an undo option. John and Jasmine may enter into a rescission agreement to extinguish the transfer and treat it as if it never existed. As a result, the County Assessor restores the old factored base year tax value of $94,237.00. However, they must pay the higher tax until the next regular fiscal tax year following the rescission (provided that the rescission was recorded before January 1st) at which time the old factored base year tax value will be restored.

If you have experienced a reassessment, please contact us at 1-800-820-2144 for a free evaluation. My Legal Depot's staff has experience in preparing thousands of legal documents. Let us prepare and file your legal documents promptly and accurately at a fraction of the cost of an attorney.

 


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