Using an LLC to transfer property in California

[flyinghigh]

What is the name of your state (only U.S. law)? California

My dad owns two multifamily buildings in California with another person. They are tenants in common and both own 50% of each building. My dads portions are in a living trust. They want to exchange the halves of the buildings so that they each own a full share of one building. The buildings were purchased 25 to 30 years ago so the property taxes are relatively low. I know that if they simply do the exchange (one is slightly more valuable so there will be some cash that will change hands) the buildings will be reassessed for property taxes to current value on the portion that changes hands.

I am in conversation with a real estate lawyer who believes that they can use an LLC to prevent the buildings from being reassessed. The process he has outlined is this:

Each owner transfer a small percentage (say 0.1%) of one building to each other. This will create a majority owner on each property. That 0.1% will be reassessed.
Create an LLC with the two owners and then within the LLC transfer the remaining 49.9% to the respective majority owner.
Remove the properties from the LLC. This is important in order to preserve the property tax for his heir (me).

Does this sound legit? The main focus is finding a way to prevent property tax reassessment for my dad and if that is possible finding a way to pass that on to me. I understand that transferring property within an LLC does not trigger reassessment under Prop 13, but then I am not clear on how to remove it from the LLC and still prevent the reassessment.

Any assistance will be appreciated!

 

[LdiJ]

What is the name of your state (only U.S. law)? California

My dad owns two multifamily buildings in California with another person. They are tenants in common and both own 50% of each building. My dads portions are in a living trust. They want to exchange the halves of the buildings so that they each own a full share of one building. The buildings were purchased 25 to 30 years ago so the property taxes are relatively low. I know that if they simply do the exchange (one is slightly more valuable so there will be some cash that will change hands) the buildings will be reassessed for property taxes to current value on the portion that changes hands.

I am in conversation with a real estate lawyer who believes that they can use an LLC to prevent the buildings from being reassessed. The process he has outlined is this:

Each owner transfer a small percentage (say 0.1%) of one building to each other. This will create a majority owner on each property. That 0.1% will be reassessed.
Create an LLC with the two owners and then within the LLC transfer the remaining 49.9% to the respective majority owner.
Remove the properties from the LLC. This is important in order to preserve the property tax for his heir (me).

Does this sound legit? The main focus is finding a way to prevent property tax reassessment for my dad and if that is possible finding a way to pass that on to me. I understand that transferring property within an LLC does not trigger reassessment under Prop 13, but then I am not clear on how to remove it from the LLC and still prevent the reassessment.

Any assistance will be appreciated!

I don't see how that can possibly work because your dad's shares of the properties are in a trust. You would have to transfer them out of the trust in order to put them in an LLC. On top of that the transfers to the LLC and back out of the LLC are still transfers. So there would be multiples transfers that would require reassessments.

Now, if the properties are not actually deeded to the trust at this time, because of its nature as a living trust, that removes one transfer, but you would still have two transfers, one into the LLC, and then one out of the LLC. An LLC is a separate legal entity, so its just like transferring to another person.

While I can understand why they would like to arrange it so that each owns one building, I really do not see any way that can be done without triggering a property tax reassessment. If they decide that the transfer is more important than the property tax assessment then its critical to make sure that its a properly done Section 1031 exchange, to ensure that no capital gains taxes are triggered.

I do not know what kind of attorney you are talking to but in order to make sure that all issues are covered, you need a real estate attorney and an estate planning attorney, as well as a tax professional all signing off on whatever you end up doing...or in the alternative, leave everything the way that it is.

 

[flyinghigh]

I don't see how that can possibly work because your dad's shares of the properties are in a trust. You would have to transfer them out of the trust in order to put them in an LLC. On top of that the transfers to the LLC and back out of the LLC are still transfers. So there would be multiples transfers that would require reassessments.

Now, if the properties are not actually deeded to the trust at this time, because of its nature as a living trust, that removes one transfer, but you would still have two transfers, one into the LLC, and then one out of the LLC. An LLC is a separate legal entity, so its just like transferring to another person.

While I can understand why they would like to arrange it so that each owns one building, I really do not see any way that can be done without triggering a property tax reassessment. If they decide that the transfer is more important than the property tax assessment then its critical to make sure that its a properly done Section 1031 exchange, to ensure that no capital gains taxes are triggered.

I do not know what kind of attorney you are talking to but in order to make sure that all issues are covered, you need a real estate attorney and an estate planning attorney, as well as a tax professional all signing off on whatever you end up doing...or in the alternative, leave everything the way that it is.

Thanks for the reply....I should have mentioned that the property would be removed from the trust as a first step. I know that in CA, transferring property to or from a trust or an LLC does not trigger a reassessment. There are some finer caveats to the LLC side of things that I dont fully understand and that is what I am trying to get more advice on. Once this is all complete, (assuming it would work) the property would be placed in the trust again.