Property tax reassessment—but more importantly, the avoidance of it all together—is a critical issue facing California property owners.  A 2017 decision by the California Supreme Court confirmed that two separate rules for avoiding reassessment—the so-called “proportionate transfer” rule and “beneficial owner” rule—may be applied together to allow a taxpayer to avoid reassessment.  It appears that one of the keys to avoiding property tax increases is to either avoid a change in ownership interest or qualify for an exclusion under the Revenue and Taxation Code. This article focuses on using two of the exclusions to avoid property tax reassessment.

California’s property taxes are computed as a percentage of the property’s assessed value.  Generally, under Proposition 13, a property’s assessed value cannot increase more than 2% per year—no matter how much its actual value may have increased—unless there has been a “change of ownership.”

“Change of ownership” is the key term to keep in mind. If a change of ownership takes place, the value of the property is immediately re-assessed to its full fair market value.  From that date forward, the property tax bills will be measured by the new, usually much increased, value of the property.

There are a number of exceptions to the change of ownership rule.  One of the most important is the “proportionate interest rule,” which allows a property’s owner to transfer the property to a business entity, such as an LLC, without reassessment.

The proportionate interest rule is codified in Section 62(a) of the Revenue & Taxation Code.  Under proportionate interest rule, there will be no change of ownership only if the owners’ percentage interests in the new business entity exactly match their former ownership interests in the property.  For example, assume that Alan and Beverly each own a 50% interest in Property 1.  They transfer Property 1 into a new LLC.  If Alan and Beverly each own 50% of the new LLC—the same proportionate ownership interests as they had in the property itself—no reassessment will take place.

It is important to mention a crucial related rule.  If the initial owners (Alan and/or Beverly) go on to transfer more than 50% of the existing LLC membership interests to other owner after taking advantage of the proportionate interest rule, the entire property will be reassessed.  (See Section 64(d) of the Revenue & Taxation Code.)  This is to prevent Alan and Beverly from doing an “end run” by transferring Property 1 into a new LLC, and then transferring the new LLC to an unrelated buyer, let’s call him Charlie. This transfer to Charlie would be seen as a transfer of ownership of Property 1, and Section 64(d) is designed to ensure that it would be reassessed.

The next installment of this series will discuss ownership by a Trust.

This is a general overview and is not legal advice. If you would like to talk with Jonathan about your particular business, tax or estate planning matter please email him at