Entity Ownership of Real Property, Change in Ownership and Reassessment for Property Taxes
Over the years many people have transferred ownership of California real property to corporations and limited liability companies.
While owning and operating real property held in a corporation or LLC can make sense and be beneficial for a variety of reasons, including for protection from personal liability, hidden issues await when shares of the corporation or membership interests of the LLC are transferred. When certain thresholds are satisfied, a “change in ownership” of the business entity could occur, which could lead to a “change in ownership” of the real property owned by the business entity. A change in ownership of the real property would trigger reassessment of the real property for purposes of property taxes, which could be a sizable financial impact.
Most transfers of LLC membership interests or shares in a corporation will not constitute a change in control or change in ownership, and instead will be subject to the general exemption in Rev & Tax Code §64. However, (i) if any one person or entity gains more than 50% ownership interest in the entity; or (ii) if cumulatively more than 50% of any original co-owners’ interests in the entity have been transferred, then a change in control has likely occurred. Revenue & Tax Code § 64(c), (d).
The second trigger can get confusing and an example helps.
A and B each owned 50% of land called Blackacre and in 2005 transferred Blackacre to ABC Inc., which corporation is owned 50% by A and B. The transfer in 2005 to ABC Inc. is exempt from reassessment because the transfer simply results in a change in the method of holding title and the proportional interests of the owners remain the same before and after the transfer. Revenue & Tax Code § 62(a)(1).
In 2015, A transfers 15% of ABC Inc. to A’s son and B transfers 15% of ABC Inc. to B’s daughter. There is no reassessment after the 2015 transfers, because only 30% of the original co-owner’s interests have transferred.
In 2019, A transfers 15% of ABC Inc. to A’s son and B transfers 15% of ABC Inc. to B’s daughter. After the 2019 transfers, cumulatively a total of 60% of the original co-owner’s interests have transferred and a change in ownership has occurred.
Some people mistakenly believe that because the transfers of corporate shares were between a parent and child the transfers are exempt under Revenue and Tax Code section 63.1, but that Section only applies to transfers of real property interests and not to transfers of interests in business entities.
The owners of ABC Inc. have transferred more than 50% of the original co-owners’ interests in ABC Inc., ABC Inc. has undergone a change in ownership which will subject the real property to reassessment. ABC Inc. will be required to complete form BOE-100 and submit to the State Board of Equalization within 90 days after the change in control. Revenue & Tax Code section 64(d). Failure to timely submit the form could lead to substantial penalties.
Before transferring interests in a business entity that owns real property in California, you should consult with your CPA or attorney to ensure all ramifications of the proposed transfer are understood.