A gift from one sister to another triggered a hike in property taxes that made what may have been intended as a kind gesture into an unexpectedly expensive transaction.

Mimi Karas Durante and her sister inherited their mother’s San Jose home when she died in 2003. They took title as tenants-in-common, with each of them owning an undivided 50% interest in the property. Durante lived in the home with her husband; her sister lived elsewhere.

In 2009, her sister granted Durante a life estate in the 50% interest that Durante did not already own. (The court records don’t state a reason for the change, but often such grants are intended to make recipients feel more secure about their right to remain in the home.) A new deed was recorded that gave Durante sole ownership rights for the rest of her life. Her sister would regain a 50% interest in the property upon Durante’s death.

After the 2009 transfer, based upon a change in ownership, Santa Clara County reassessed the home’s value for property tax purposes and sent Durante a “significantly higher” tax bill. Durante asked the county to revise its appraisal, claiming that the creation of a life estate did not effect a change in the ownership of the property.

The county denied her request, and Durante sued, seeking a property tax refund. The trial court sided with the county, finding that the deed granting Durante a life estate did indeed constitute a change in ownership. Durante then appealed. (Durante v. County of Santa Clara.)

Durante argued that granting a co-tenant a life estate in a tenancy-in-common interest is not a “change in ownership,” and thus should not have caused a reappraisal of the home’s value.

She said the 2009 deed granting her a life estate simply memorialized her mother’s intention to allow Durante to occupy the property for life, as evidenced by the fact that she and her husband lived there and her sister did not.

Durante also said that, because she alone had the exclusive right to possess the property at the time the sisters inherited the home, she didn’t receive anything as a result of the 2009 deed that she didn’t already have.

The appellate court noted that according to the tax code, a 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.” It pointed out that the language of the statute expressly includes the creation of a life estate in a property as a “change in ownership.”

Moreover, the appellate court noted, “the tenancy-in-common interest transferred to plaintiff––a life estate––is a present interest in real property, carrying with it all the beneficial use of the property.”

It agreed with the trial court’s finding that, until Durante’s sister transferred the life estate, both women had the right to beneficial use of the property, even though Durante and her husband were living there. So, contrary to Durante’s claim, the transfer did result in her receiving something she did not previously possess.

The higher court noted that California tax law allows for reassessment of property “upon a true change of ownership of the fee interest or an interest substantially equivalent to the fee interest,” but not “when a transfer merely effectuates a change in the method of holding title to the property.” Because a life estate “is an interest substantially equivalent to the fee interest,” it said, the one granted to Durante constituted a true change of ownership.

Thus, the appellate court ruled, the trial judge was correct in finding that the home’s value could be reassessed.

By Laurie Murphy