Category: Estate Planning
The price of real property in California is very high compared to the rest of the US.
But how much more expensive are properties in California compared to the rest of the country? According to recent data, average properties in California are, in many cases, twice as expensive as a similar property would be in many other US states. Not only that, but a bottom-tier home in California is 33% more costly than a mid-tier home in the rest of the US.
Unsurprisingly, for many families in California, their home is by far the most valuable asset in their estate. Usually, when they arrive at the trust and estate attorney’s office to prepare their estate plan, their primary concern is to ensure that their real property passes to their selected beneficiaries as smoothly as possible.
Although most people would gladly inherit real property in California, the attached property taxes that, unless there is an applicable exemption, will be readjusted upon the death of the previous owner sometimes create an unpleasant situation in which the intended beneficiaries of the real property have to sell the property they inherited simply because they cannot afford the property taxes.
To understand how this situation arises and what can be done to avoid it, we must first understand how property taxes are calculated in California. Property taxes are based on the purchase price of the property. The exact property tax percentage varies from county to county in California. For new home buyers, generally, a good rule of thumb to calculate their property taxes for their new home is to multiply the purchase price of the new property by 1%, which will be the annual property taxes collected by the county. (in addition, the local taxes are usually another 0.25%). The property taxes can be increased yearly but by no more than 2% annually.
Upon a real estate transfer in California, the relevant county will reevaluate the property for property tax purposes unless an exclusion applies. A reevaluation of a property, upon a transfer due to the passing of the former owner can be devastating to the beneficiaries due to the massive increase in property taxes.
A typical example is when parents bought their home in San Diego in the 1970s for $15,000. Subject to the annual adjustment, their yearly property taxes will be around 360 dollars in 2025. However, suppose the parents pass away, and their property is now worth one million dollars, and they leave the property to their children. If no exclusion applies, the county will reassess the value of the property, and the new property taxes will be around $10,000 a year!
Prop 13 and Prop 19
Specific exclusions apply to reassessments upon a transfer of property. Before Prop 19 came into effect in 2021, Under Prop 13, parents could transfer their real estate to their children in California, without the transferred proeprties being reassesed, regardless of whether it was their primary residence. Prop 19 severely limited Prop 13 in certain regards. Under Prop 19:
- Parents could no longer transfer property they owned that was not their primary residence without it being reassessed for property taxes.
- The transfer of the parent’s primary residence to their children without the property taxes being reassessed is subject to the requirement that one of the children take the parents’ primary residence as their own principal residence.
This presents a significant problem for families with multiple properties as they want to transfer their real property to their children without significantly increasing their children’s tax obligations.
Purchasing and Holding the Asset Through An LLC
As the rules for reassessment of real property in California differ between individual people and corporations, purchasing all real property, excluding the main residence, through an LLC is a creative way to avoid reassessment upon the passing of the Settlor.
It is important to emphasize that the properties must be purchased through an LLC instead of the properties being purchased first by the individual Settlor in their name and then transferred to an LLC.
As held by a decision of the California Court of Appeal for the Second District in Ocean Avenue LLC v. County of Los Angeles, If the LLC purchases real property, there will be no future reassessment of the properties held in the LLC, provided that no one person or entity gains more than 50% ownership/control of the LLC in the future.
This solution can work well for parents with multiple properties and more than one child. No reassessment will be required as long as no child receives more than 50% control of the LLC holding the property.
Do you need assistance in getting your estate plan created? Contact Amichai Law to see if we can assist you in any way.