Transferring Property to an LLC
In California, when real estate is transferred it typically results in a change in ownership, which causes the property’s taxable value to be reassessed. However, there are a few exceptions to help avoid a reassessment and possible tax increase. If done incorrectly, you may end up dealing with costly reassessments as well as tax fines and interest on the additional amount owed. With the guidance of an attorney, you can properly navigate transferring any property to or from your company to avoid paying more in taxes and steer clear of legal and tax liabilities.
How to Protect Property by Establishing a Business Entity
Transferring a property to a business can be done in a few different ways without causing a reassessment. One is legal entity exclusion, in which a legal entity transfers 50% or less of its stake to another legal entity. If real property is owned by a legal entity, up to half of that entity’s interest may be transferred without resulting in reassessment. There will be a reassessment if 51 percent or more of the legal interest is transferred. Business owners who want to establish a new legal entity without changing the ownership of their company frequently employ this tactic.
The proportional interest exclusion is an approach that is more prevalent. Due to this, real estate owners are able to transfer their property to or from a legal entity, such as an LLC. The catch is that each person must have a proportional stake in the new legal entity. You can create a legal entity with the same ownership interest distributions as the real estate with the help of an attorney. It’s crucial to keep in mind that this is the single exception that applies to people who are transferring property to or from an LLC or another type of business entity.
There is one more option that joint tenants can use. When two or more owners hold a joint tenancy, the property goes to the survivors upon the death of each owner. As long as one of the original joint tenants still maintains the title, the survivors are able to postpone reassessment under the “original transferor” rule. Due to the infrequent occurrence of joint tenancies, this is not often used in the case of business properties.