If I own a rental property in California, should I create an LLC to hold title to the property?
Yes. A California LLC can serve to shield your personal assets from lawsuits and claims arising from the property. For example, if there is an injury/accident on the premises, (with or without insurance), the injured party can only sue the LLC and not you personally. In this way, a California LLC is treated much like a corporation.
If I own more than one rental property in California, should I form a separate LLC for each property?
Generally, yes. If the LLCs are set up correctly, only the assets of the particular LLC relating to the claim would be subject to a lawsuit against that LLC.
I own rental property in California and I have children applying to college. Should I transfer my rental property to a California LLC?
Yes. Not only do you receive the benefit of limited liability (discussed above), by setting up an LLC, you may also qualify for college financial aid for which you would not qualify had you left title to the property in your name. For those interested in learning more, please contact us.
Is there a change in ownership if I transfer the rental property to my California LLC?
Yes. Technically any transfer of a present interest, including to your own LLC, constitutes a change in ownership. But there are exclusions which may apply. See below.
What are the exclusions from property tax reassessment?
The State of California has created several exclusions for certain property transfers such that there is no reassessment even though a change in ownership has occurred. Here are some of those exclusions:Transfers of a principal residence between parents and children;Transfers of a principal residence between grandparents and grandchildren;Purchase of a replacement residence by a person who is 55 years old or older where the replacement residence will become the principal residence;Transfers between husband and wife;Transfers in the creation of a joint tenancy where the transferor remains one of the joint tenants;Transfers to a revocable living trust where the transferror retains the power to revoke the trust.
If my spouse and I own a rental property and we transfer it to an LLC, is there an applicable exclusion in California?
So long as the owners prior to transfer remain the owners after transfer with the same proportional percentage of ownership, there is an exclusion. Thus, if the husband and wife own the property 50% each before the transfer, and become equal members/owners of the LLC after the transfer, there should be no property tax reassessment. The deed and preliminary change of ownership statement must be completed correctly highlighting such exclusion to avoid reassessment by the county in which the property is situated. It is best to contact our office to prepare the paperwork.
New California Proposition 19 Questions
1. When real property is left to more than one child, one may want the property and the other may want money or other assets of equal value. If the trust provides the property is left to each child equally, it will be necessary for one child to transfer his/her interest in exchange for the equalizing payment. At this point it is no longer a parent-child transaction as contemplated by prop.19. It is a sibling to sibling transaction. There is no exemption under prop 19. Instead there would be a "change in ownership" triggering a reassessment and an increase in property taxes.
2. A key recurring question in this new world created by proposition 19 is: When is there a "change in ownership" triggering reassessment?
Hypothetical- Mother and father set up a revocable living trust in 2015. Mother passes away in 2019 and as per the trust, an irrevocable bypass trust is created to hold title to the family home for the benefit of husband and their son. Father passes away in 2022. At father's death the family home is distributed to the son.
What is the date of change in ownership for purposes of son's applying for the $1M exclusion should he decide to keep and reside in the family residence? Answer: The date of death of mother since in 2015 it was then, that father gained the "beneficial ownership" of the family home. Since this is a transfer between spouses it is excluded from change in ownership and reassessment. The family home however is transferred again on the date of father's death in 2022. Since it was not transferred until 2022, AFTER proposition 19 went into effect, the parent-child $ 1M exemption will then apply to the change in ownership to the son. But note, the taxable reassessed value in 2022 would likely be higher than in 2015. So the son, notwithstanding the $ 1M exclusion, will be paying higher taxes.
3. A rental property is owned by an LLC. The LLC owners are John, Paul, George, and Ringo. They each own a 25% Member/owner interest in the LLC. In order to refinance, the lender requires that title to the property be transferred from the LLC to the Members outright. Each Member receives his 25 % interest, so the loan can be placed. Absent information of the LLC's owners, the Assessor may initially view the transaction as a 100% change in ownership and reassess the property value and thereby increase the property tax. However if John, Paul, George, and Ringo can provide a copy of the LLC Operating Agreement and tax returns for the year in which the transfer took place, the Assessor can exclude the transfer from change in ownership and reverse the assessment.