Navigating California’s Property Tax Reassessment Rules
California’s property tax system is governed by a set of rules that determine how properties are assessed and taxed. Under California’s Proposition 13, passed in 1978, the property tax rate is set at 1% of the property’s assessed value, although this amount has been increased many municipalities by ballot measure. Crucially, Prop. 13 limits annual increases to the property’s assessed value to 2% or the rate of inflation, whichever is lower. This provides property owners with a predictable tax burden and protects them from substantial tax increases due to the increases in the property’s actual value.
Under Prop. 13 and related rules, your property may be “reassessed”—i.e., have its assessed value brought up to its actual fair market value—if there has been a “change of ownership.” (New construction on the property can also cause the property to be reassessed.) Reassessment can result in a dramatic increase in the property taxes owed by the property’s owners.
Trusts, LLCs, and limited partnerships are commonly used to hold real estate due to their potential tax advantages and liability protection. However, it is crucial to understand how property tax reassessment rules apply to these entities to avoid unexpected tax increases.
Trusts: When it comes to trusts, the reassessment rules can differ based on the type of trust and the nature of the property transfer.
- Revocable living trusts: Typically, transferring property to or from a revocable living trust does not trigger a reassessment, as long as the original owner retains control of the trust. This allows property owners to maintain the benefits of Proposition 13 while managing their estate planning.
- Irrevocable trusts: Property transfers to an irrevocable trust may result in a reassessment, depending on the trust’s beneficiaries and their relationship to the original owner.
Limited Liability Companies (LLCs) and limited partnerships: The reassessment rules for LLCs and limited partnerships are more complex, as they depend on the ownership structure and the nature of the property transfer.
- Initial property transfer: Transferring property to an LLC or limited partnership generally triggers a reassessment, as it is considered a change in ownership. However, there is a specific exception for transfers involving legal entities where the proportional ownership interests remain the same before and after the transfer. For example, if you are the sole owner of a property and transfer it to an LLC which you also own as the sole owner, the property will not be reassessed. This is known as the “proportionate ownership rule.”
- Ownership changes within the LLC: The transfer of LLC or partnership interests can also result in reassessment in two situations:
- If the company undergoes a change in control—i.e., if a stakeholder acquires more than 50% of all of the interests in the company—all of the property it owns will be reassessed at its current market value.
- If the property was transferred to the company using the “proportionate ownership rule” described above, it will be reassessed if a cumulative total of more than 50% of the interests in the company are transferred. This is true even if no single person obtains control by acquiring a majority interest.
Several strategies can help minimize the impact of reassessment rules on trusts, LLCs, and limited partnerships:
- Careful structuring: Designing the ownership structure of the entity to align with the proportional interests of the property owners can help avoid reassessment when transferring property to an LLC or limited partnership.
- Monitoring ownership changes: Keeping track of ownership changes within the entity and planning for any transfers that could trigger reassessment can help mitigate unexpected tax consequences.
- Legal and tax advice: Engaging experienced professionals, such as attorneys and accountants, can help ensure compliance with California’s property tax reassessment rules and provide guidance on minimizing tax exposure.
