When real estate is transferred in California, it generally constitutes a change in ownership that triggers a reassessment of the taxable value of that property. There are, however, a few key exclusions that can be used to avoid this trigger and protect your business from added tax liability. If you are considering transferring any property to or from your business, be sure to consult with an attorney about the best way to do this. The investment of attorney’s fees can pay dividends in reduced legal and tax liabilities. Errors, however, can lead to costly reassessments, in addition to tax penalties and interest on the added amount due.
Protecting Property Through the Creation of a Business Entity
There are a few different ways to transfer property to a business entity without triggering a reassessment. One is the legal entity exclusion. This rule allows you to avoid a reassessment if 50 percent or less of the interest in a legal entity is transferred to another legal entity. So if real property is held by a legal entity, up to half of the interest in that legal entity can be transferred without triggering a reassessment. If 51 percent or more of the legal interest is transferred, there will be a reassessment. The strategy is often used by business owners who are creating a new legal entity without changing the ownership of their business.
A more common strategy is the proportional interest exclusion. This allows individuals who own real property to transfer it to or from a legal entity (such as an LLC). The catch is that the individuals must have a proportional interest in the legal entity that is created. An attorney can help you create a legal entity with the same ownership interest proportions that currently exist on the real property. It is important to note that this is the only exclusion that is available for individuals transferring property to or from an LLC or other business entity.
There is one final strategy that is available to joint tenants. A joint tenancy allows two or more owners to hold property that passes to the survivors as each owner dies. The “original transferor” rule allows the survivors to delay reassessment for as long as one of the original joint tenants holds title. This is not often used in business properties because they are almost never held in joint tenancy.
California Business Lawyers For All Business Property Transfers
There are many legal strategies that can help business owners avoid a reassessment of their real property. With the fast appreciation of California’s hot real estate markets, these strategies can save you thousands of dollars in tax liability. It is important to work with an experienced business lawyer to develop the tax strategy that is right for you, your company, and your real estate. Contact Structure Law Group at (408) 441-7500 to schedule a consultation or contact us online. Our experienced attorneys have helped many California business owners develop effective legal and tax strategies that [rime their companies for financial success.