Mcle Article: Legal Entities and Real Property: Limiting Reassessment
| Publication year | 2018 |
| Author | By Joshua R. Driskell and Zacharias N. Tripodes |
By Joshua R. Driskell and Zacharias N. Tripodes
Joshua Driskell focuses his practice on business, tax, estate, bankruptcy and related matters. He is a member of the Pasadena Bar Association, the Los Angeles County Bar Association and the California Bar Association. Prior to the formation of Primuth & Driskell, LLP with Partner Jonathan Primuth in 2014, Mr. Driskell worked at a multi-state law firm, handling a wide variety of matters for individuals and small and medium sized businesses. In addition to his activities as an attorney, Mr. Driskell is a board member for the Pasadena Museum of History, Leadership Pasadena, and Pasadena Fire Foundation.
Zacharias Tripodes focuses his practice exclusively on transactional matters, including business, estate, trust and probate matters. Prior to joining Primuth & Driskell, LLP as Associate Counsel in 2016, Mr. Tripodes externed for the United States Custom and Border Protection. Mr. Tripodes earned his juris doctor from Loyola Law School, where he was a member of the International and Comparative Law Review. Mr. Tripodes is admitted to practice law in all California state courts and the United States District Court for the Central District of California.
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Legal practitioners have rightfully promoted the many advantages of holding real property in corporations, limited liability companies (LLCs), and other legal entities. By doing so a landowner can limit personal liability, exercise a degree of anonymity, and realize various tax efficiencies. However, when advising clients regarding the transfer of real property to a legal entity, due diligence requires careful consideration of any property tax consequences.
With the passage of Proposition 13 in 1978, voters drastically altered California's real property tax regime. Property taxes are now assessed on a property's 1975 value, as adjusted for inflation by no more than 2% per year.1 A re-appraisal of real property occurs only where one of the following events takes place: (1) new construction on the property or (2) a change in ownership.
In the context of holding real property in a legal entity, the more common event leading to possible reassessment is a change in ownership. California law sets clear rules on when a transfer constitutes a change in ownership. This area of the law is based on several decades of practice and case law and is therefore well developed. Moreover, because the Proposition 13 regime has depressed the assessed value of property statewide, local tax authorities will not hesitate to characterize a real property transfer as a change in ownership in the event of an error. It is therefore very important to understand and follow these rules. The following are the most common change in ownership exclusions applicable to legal entities. Excluded are the less common situations of mergers, acquisitions, and transactions between affiliated entities, as well as specific rules applicable to partnerships and cooperative housing corporations.
The California Revenue and Taxation Code defines a "change in ownership" as "a transfer of a present interest in real property, including the beneficial use thereof, the value of which is...
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