If you are a California property owner using an LLC, you have likely heard a story: a simple change in business structure triggers a massive property tax reassessment, sending your annual bill soaring. Under California’s Proposition 13, property taxes are based on the purchase price, with only modest annual increases. If you change ownership, it can reset the taxable value to current market rates. For LLCs, it is essential to understand these rules.
Let’s take a moment to examine the complexity and discuss real-world strategy. How can an LLC avoid property tax reassessment in California? This blog is about understanding the triggers, planning transactions carefully, and learn about the tax discount that states provide for LLCs.
Understanding the Reassessment Trigger: It’s All About “Change in Control”
First, we need to understand what the California State Board of Equalization (BOE) is looking for. For an LLC holding real property, a reassessment is not automatically triggered by adding a new member or restructuring the LLC. Instead, it’s triggered by a cumulative “change in control” of more than 50%.
Think of it this way: the county assessor views your LLC as a vessel that owns the property. They are less concerned with the ship itself and more concerned with who has controlling ownership of that vessel. If, over any rolling 12-month period, more than 50% of the ownership interests (capital, profits, voting rights) transfer to new parties, the county will likely deem a change in ownership has occurred. This is the core concept behind property tax avoidance strategies for entities.
Key Strategies and Exemptions to Prevent Reassessment
Here, we have outlined primary methods and legal provisions that can be used to avoid property tax reassessment in California for properties owned by an LLC.
1. The Parent-Child and Grandparent-Grandchild Exclusion
This is one of the most potent tools available, thanks to Propositions 58 and 193. While typically used for direct transfers, it also applies to transfers of LLC interests if the LLC’s sole asset is the real property in question.
How it works: You can transfer up to $1 million of assessed value (per parent, to each child) of investment property without reassessment. For a primary residence, there is no dollar limit.
LLC Application: If a parent wishes to transfer an LLC interest to their child, they must confirm that the LLC is either a single-member LLC or that all members are qualifying parties (i.e., parents or children). The LLC should be a “pass-through” entity, and all detailed documentation must be submitted to the county assessor to claim this exclusion.
2. The 50% Rule: Slow and Steady Transfers
Since the trigger is a cumulative change of over 50%, you can strategically plan transfers to stay under this threshold.
Example: If a founding member wants to bring in two new partners, instead of transferring 33% to each at once (resulting in a 66% total change), you could stage the transfers to achieve a more gradual change. Transfer 25% in Year 1, and 25% in Year 2, keeping every 12 months’ change at or below 50%. This requires proper planning and amendments to operating agreements, but it is a valid California property tax planning technique.
3. The Original Co-Owner Exclusion (BOE Rule 462.220)
This is a lesser-known but fundamental rule. When multiple individual initially purchase property and later transfer it into their newly formed LLC. Then, no reassessment occurs if the ownership percentages in the LLC match their original direct ownership percentages.
Scenario: For example, Alex and Ben buy a property as tenants-in-common, each owning 50%. A year later, they made an LLC and transferred the property to it. Each receives a 50% membership interest. This is not a change in control because the ultimate beneficial ownership has not changed. Documenting the original purchase and the identical transfer percentage is key to securing this exclusion.
4. Interspousal Transfers
When a married couple passes LLC ownership between them due to marriage, divorce, or the death of one spouse, the property tax value typically does not get reassessed. That means they can rearrange their assets for protection or estate planning without facing a higher property tax bill.
5. The “No Reassessment on Formation” Rule
If you own a property yourself and put it into your own LLC, the property tax value usually won’t go up. Many people get this wrong. Think of it this way: you are not really selling it to someone new. You are simply transferring ownership from your personal name to a company name that you still entirely own. The government typically does not view this as a change that warrants increased taxes. The beneficial ownership hasn’t changed. However, the subsequent transfer out of that LLC (such as selling a membership interest) will likely be a trigger.
Critical Pitfalls and Proactive Steps
The “Single-Member LLC Trap”: If you are the sole member of an LLC and you sell more than 50% of your membership interest, that is an apparent change in control. Even selling 50.1% to a single new member triggers it.
Document Everything: The burden of proof is on you, the taxpayer, to file the necessary exclusion forms (like the Claim for Reassessment Exclusion for parent-child transfers) with the county assessor. Do not assume automatic application.
Get Professional Help: This is not something you should attempt on your own. The rules from the tax code, the terms in your LLC’s contract, and what your family wants to accomplish all affect each other in complicated ways. Getting this wrong isn’t a small mistake – it could easily lead to a tax bill that costs you hundreds of thousands, or even millions, of dollars over the years.
Why This Matters for Your Business and Family Wealth
Properly structuring your LLC ownership is not just about asset protection; it is also a good way to maintain long-term wealth. A property tax bill that jumps from $10,000 annually to $40,000 can cause harm to the cash flow of an investment or impede a family’s ability to hold onto generational property. Strategic planning allows you to maintain predictable expenses, enhance real estate investment returns, and seamlessly integrate property into your broader estate planning goals.
Frequently Asked Questions (FAQ)
1. Does adding my spouse to my LLC trigger property tax reassessment?
No. In California, transferring property between spouses typically does not cause a reassessment.
2. If I inherit an LLC interest from my parent, will the property be reassessed?
No, it will not be reassessed, as long as you file for the parent-child exclusion and the LLC qualifies for it.
3. Can I sell a 49% interest in my LLC without triggering reassessment?
Usually, yes. Selling 49% at once avoids the immediate “change of control” rule. However, be cautious – if you make other transfers that total more than 50% within a year, it could trigger a reassessment.
4. Does refinancing a property owned by my LLC cause a reassessment?
No. A standard refinance is just getting a new loan; it doesn’t change who owns the property, so reassessment isn’t triggered.
5. Where do I file paperwork to claim an exclusion from reassessment?
You need to file the correct claim form with the County Assessor’s office for the county where the property is located.
Navigating with Expert Guidance
The strategies mentioned here are a starting point, but their proper implementation requires precision. Every situation is unique, and there are exceptions to the rules. That is where partnering with a specialist firm becomes essential.
At Eric M Hunt, CPA, we specialize in structuring, California property tax law, and strategic wealth preservation. We work with you, your attorney, and your family to build a proactive plan that aligns your LLC with your financial goals. This will help you to avoid unnecessary tax triggers. Let us help you to secure the benefits of Prop 13 for generations to come.
How can an LLC avoid property tax reassessment in California? It starts with a plan. Let’s build yours.
