A home means the world to California families. A home can be a place to live, learn, grow, and build a family in. A home can also be a place to escape on vacation or a source of income for those who wish to build a real estate portfolio in our state. Rental properties and vacation homes can be passed on and help build generational wealth in your family.
California property owners need an effective tax strategy in place to protect that wealth. This has become even more important since the passing of Proposition 19 in 2020.
Prop. 19 added significant increases to the tax burden of those who inherit properties in order to increase property tax benefits for certain groups. If you bought your property for significantly less money (what your property taxes are generally based on), your children would be on the hook for a much larger property tax bill upon receiving the property … unless you have a proper strategy in place.
How Does Proposition 19 Impact the Transfer of Real Estate?
Under previous California laws, parents were able to transfer any property to their children without a tax reassessment. The only circumstance where a tax reassessment would be necessary was be when a parent transferred real estate that is not their primary residence to a child and that property is worth more than $1 million.
Proposition 19, which narrowly passed with just over 51% of the vote, impacted both of those conditions – limiting the tax protection of the receiving family member. Now, the transfer of a primary residence to your children is only exempt from a tax reassessment if they maintain the property as their primary residence AND the difference between the current fair market value of the home and the current taxable value is not more than $1,000,000. In the case of the latter, if the difference does exceed $1,000,000 then the new taxable amount would be the current property value minus $1,000,000. This exemption is stripped once the child no longer holds the home as their primary residence.
If you transfer property, primary or not, to a family member who does not intend to keep the property as their own primary residence then there is no exemption, and a tax reassessment would apply.
Using an LLC to Avoid a Property Tax Reassessment
Proper strategizing will allow you to get ahead of this issue. When real estate is held by a business entity such as an LLC, different rules apply. A property transferred through an LLC will not face tax reassessment as long as one of the two following circumstances are met.
1. If the property was originally purchased through the LLC, then the transfer of the LLC will not trigger a tax reassessment unless one person assumes more than a 50% interest in the LLC. Multiple people can own portions of the LLC that total up to 100% as long as no one person owns more than 50%. When you pass away, it would be necessary to ensure the LLC is passed on in portions under 50% each to avoid triggering the reassessment.
2. If the property was not originally purchased through an LLC but was later transferred to the LLC, then no more than 50% of the LLC interests of the original transferors can be transferred without triggering a tax reassessment of the property. If a property is purchased by an individual, transferred into an LLC, and then 50.1% of the LLC is eventually dispersed among other individuals then the entire property tax will be reassessed. When you pass away, the entirety of the property will be reassessed regardless of how much interest any individual obtains in the LLC because the total transferred interest will be above 50%.This highlights the importance of a long-term tax strategy. You must think ahead and have an LLC in place at the time of purchasing a property in order to later skip out on the tax reassessments levied through Proposition 19. Californians should count on the knowledge of experienced tax attorneys who can help them structure LLCs, secure properties under the LLC, and transfer those properties without triggering additional tax liabilities.
The Law Offices of Tyler Q. Dahl
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