How can I avoid a reassessment of property taxes in CA when transferring property

In California, property taxes are reassessed when ownership changes, as per the rules established by Proposition 13, which was passed in 1978. This law limits property tax increases to 2% per year until there is a change in ownership, at which point the property can be reassessed at current market value. However, there are exceptions to this rule that can prevent a reassessment, even in the case of transferring property into a Limited Liability Company (LLC). One such exception involves transferring property into an LLC where the proportional ownership interests in the property remain the same.

Legal Framework

Under California's Revenue and Taxation Code, certain types of ownership transfers do not constitute a "change in ownership" that would trigger a reassessment of property taxes. The rationale behind this exception is that, from a practical standpoint, the economic benefits and burdens of the property remain with the same owners, even though the legal title may change.

Reasons Why Transfer to an LLC May Not Trigger Reassessment

1. Same Ownership Percentage: If the property is transferred into an LLC, and the owners of the LLC have the same proportional ownership interests as they did in the property prior to the transfer, the economic realities have not changed. The State Board of Equalization, which oversees the administration of property taxes in California, recognizes that such transfers do not alter the actual control or beneficial ownership of the property. Therefore, the transfer does not constitute a change in ownership that would trigger a reassessment.

2. Continuity of Ownership: The law aims to tax changes in ownership that reflect real changes in control and beneficial use of the property. When the same individuals or entities continue to control and beneficially use the property in the same proportions through an LLC, the policy reasons for reassessment (i.e., a change in value due to a new owner's likely higher purchase price) do not apply.

3. Legal Entities as Transparent Vehicles: For the purposes of property tax, legal entities like LLCs can sometimes be treated as transparent vehicles through which the real owners hold the property. This perspective helps in maintaining the status quo in terms of property taxation, unless there's a substantial change in the ownership structure or the proportions held by the members.

Important Considerations

While the transfer of property into an LLC with the same ownership percentages can avoid reassessment, it's crucial for property owners to comply with all relevant legal requirements, including filing the appropriate forms with the county assessor's office. Missteps in this process can lead to unintended reassessments.

Moreover, this exception does not apply universally to all transfers involving legal entities, and specific conditions must be met. For example, changes in ownership percentages among members of the LLC or additional transfers could trigger reassessment.

Conclusion

Transferring property into an LLC without triggering a reassessment for property tax purposes is possible in California under certain conditions, primarily when the ownership percentages among the members of the LLC mirror their interests in the property before the transfer. This exception reflects the principle that mere changes in the form of ownership, without substantive changes in control or economic benefits, should not lead to a reassessment of property taxes. However, property owners should proceed with caution and may want to consult with legal or tax professionals to ensure compliance and avoid unintended tax consequences.