If one of your goals is to transfer real estate to your children without incurring a property tax reassessment, you might be able to accomplish this by forming a family limited liability company (LLC) to hold your real property. By making your children members of a family LLC, your property might be able to transfer to them without a costly property tax reassessment.
Proposition 19 Changes How Parents Transfer Real Estate to Children
Passed in 2020, California's Proposition 19 limited the conditions under which real property could transfer from parents to their children without a property tax reassessment. Previously, parents could avoid reassessment and transfer their primary residence, plus up to $1 million of assessed value on other real property that they wanted to transfer.
Under Prop 19 however, parents can only transfer their principal residence to a child who moves into their home, and even then, only up to $1 million of the real estate's fair market value is potentially excludable from property tax reassessment.
The problem of course is that the value of many properties in California have exploded over the years. For example, homes that were purchased for less than $200,000 may be worth over $2 million today – especially in many parts of Los Angeles County. In reality, many children cannot afford to hold onto properties that are reassessed to current fair market value which greatly increases their property taxes. This results in forced sales and in a down market (like the one we are going through today) the consequence is that inheritances are unfortunately greatly diminished. Plus, vacation homes that previously were passed down from generation to generation for all to enjoy can no longer be held because children cannot afford the expenses of carrying those properties.
Forming an LLC Can Help Avoid Property Tax Reassessment
Californians can transfer real estate to children without incurring a property tax reassessment by using a strategy that relies on family LLCs, but such requires time, planning and action.
One strategy when someone has two children is to first utilize an LLC and transfer fifty percent (or less) of the LLC interest to one child. That's because the Assessor offices in California will allow a transfer of 50% or less of an entity that holds real property without increasing property taxes.
So, for example, a parent can form an LLC and transfer real estate into it. No reassessment occurs because – as a sole-member LLC – no change in ownership occurred. From the LLC, the parent can then transfer a 50% ownership interest to one of their children. Then time is a key element. That is, one or two years should pass to prevent a series of transfers from being treated as a single transaction.
After that time has elapsed, the parent and the first child remove the property from the LLC and hold it in their individual names. Because no party holds more than a 50% interest, there is still no change in ownership and a property tax reassessment is not triggered.
Now, the parent and first child create a second LLC and transfer their real estate ownership interests into it. Only the manner in which the title is held is affected, so this transfer also does not trigger a property tax reassessment. Again, another year or two must pass before reaching the final stage of this strategy.
Once the second waiting period has passed, the parent again transfers their interest in the second LLC (which is now 50% of the real property) to their second child, leaving both children in equal control of the real property without ever transferring more than 50%. And voila, no property tax reassessment has occurred. (Please note that this example is super simplified and strategies such as this one should not be performed without the help of an experienced tax and estate planning attorney.)
Contact Us for Legal Assistance
As you can see, it's still possible to avoid a property tax reassessment on transfers of your California real estate by working with an experienced estate planning lawyer. Proposition 19 has made it more difficult for families to efficiently transfer real estate, but there are strategies that can help your family avoid (or reduce) property tax reassessment.
Kaiden Elder Law Group, PC can help you explore your tax planning options and devise a strategy to help your family tax efficiently move real estate from one generation to another. Learn more about how to do this by requesting an initial consultation.