With rising real estate prices, it is increasingly becoming important to make sure your property taxes are not reassessed based on a higher property value. In California, all counties are allowed to reassess property taxes when there is a change in ownership. However, there are times when it is necessary to change the ownership structure to either protect the asset, for inheritance purposes, or to avoid capital gain taxes. At that time, it is important to structure the change in ownership to avoid a reassessment of your property taxes.
1. The Legal Entity Exclusion (Revenue and Taxation (R&T) Code Section 64(a)(c)
One method of avoiding reassessment is to hold the property in a legal entity such as a limited-liability company (LLC) or corporation. For this method to work, upon purchase of the property, you must transfer the property immediately into a legal entity. (Do not delay as each year price of property goes up). Once the property is transferred into the legal entity, the property must remain in the legal entity to avoid reassessment.
The benefit of holding a property in a legal entity is that you can change ownership in the legal entity without triggering a reassessment. For example, if you bought a property and transfer the property into an LLC, you can easily change the ownership of the LLC without changing the ownership of the property: just sell the ownership interest in the LLC.
2. The Proportional Interest Exclusion (R&T Code Section 62(a)2)
The above-mentioned exclusion will only work if the property is in an entity already. If the property is not in an a legal entity, but needs to be transferred into a legal entity, you will have to use the “Proportional Interest Exclusion.” As long as the individual owner and the legal entity has the same proportional ownership interests, the property will not be reassessed when transferred to or from the entity or the individual. For example, mom, dad and son owning property 40%, 40%, and 20% can transfer property to an LLC where mom, dad, and son owns with LLC 40%, 40%, and 20%.
3. Original Transferor Exclusion (R&T Code Section 65)
Original Transferor Exclusion will delay reassessment when one owner dies and is survived by another owner who is an “original transferor.” For example, if A and B owns a property together and A dies, B obtaining full ownership is not considered a change in ownership for purposes of property tax reassessment.
Interspousal transfer of property is excluded from property reassessment. In other words, a transfer of property interest between husband and wife is not considered change in ownership for property tax purposes. Additionally, a common occurrence is transferring property to children. Transfer of property to children is excluded from reassessment as long as the property is considered the parent’s principal residence. For property that is not considered principal residence, the first $1,000,000 of full cash value of the other properties is considered exempted from property tax reassessment.
It is important to plan out ownership of property and structure any type of transfer of ownership in property to avoid reassessment of property taxes. Speak to an attorney to discuss your situation and to find out how to structure ownership to avoid any type of reassessment on your property taxes. Once there is a reassessment, it is too late.
Eric W. Ching is a real estate attorney with Ching & Seto, APC.