How Can an LLC Avoid Property Tax Reassessment in California?

Transferring California real estate into an LLC without triggering a property tax reassessment requires careful planning. Thanks to Proposition 13, California property owners enjoy a tax base that generally only increases by a small percentage each year—until a "change in ownership" occurs. This article explains precisely what constitutes a change in ownership for legal entities and how you can structure real estate transfers to an LLC to maintain your low tax basis.

Understanding Proposition 13 and Reassessment

Passed in 1978, California’s Proposition 13 is a cornerstone of the state’s property tax system. It limits property taxes to 1% of the property's assessed value at the time of purchase (the "base year value"), plus any direct assessments or voter-approved bonds. Each year thereafter, the assessed value can only increase by an inflation factor, capped at a maximum of 2% per year.

This protection evaporates upon a "change in ownership." When this happens, the local county assessor is required to reassess the property to its full, current market value, establishing a new—and almost always much higher—base year value. This can cause the annual property tax bill to jump significantly. For business owners and real estate investors looking to move property into an LLC for liability protection or estate planning, avoiding this reassessment is a top priority.

In general, a change in ownership is defined as "a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest." Transferring title from an individual to an LLC clearly meets this definition, but California's Revenue and Taxation (R&T) Code provides critical exclusions.

The Proportional Interest Exclusion: Your First Line of Defense

The most common and direct way to transfer real property into an LLC without triggering reassessment is by using the "proportional interest" exclusion found in R&T Code § 62(a)(2). This rule allows for a transfer to be excluded from being a "change in ownership" if the ownership interests in the property remain exactly the same before and after the transfer.

For this exclusion to apply, every individual who owned the property before the transfer must have the same proportional ownership percentage in the LLC after the transfer. Think of it as merely changing the method of holding title, not changing who owns what. The County Assessor sees through the legal form to the underlying beneficial ownership.

Example: A Correct Proportional Transfer

• Before: Jane and John own a commercial building as tenants in common, with each holding a 50% interest.
• The Transfer: They form "J&J Properties, LLC" and execute a deed to transfer the building to the new LLC.
• After: The LLC’s operating agreement states that Jane and John are each 50% members of J&J Properties, LLC.
• Result: No reassessment. The ownership is still 50/50. Their proportional interests have not changed.

Example: An Incorrect (Reassessable) Transfer

• Before: Maria owns 100% of a property.
• The Transfer: She forms an LLC with her brother, Leo, to manage the property. She transfers the property into the LLC.
• After: The LLC’s operating agreement gives Maria a 70% membership interest and Leo a 30% membership interest (perhaps in exchange for his work managing it).
• Result: A 100% change in ownership and full reassessment. Because the proportional ownership is no longer the same for all transferors before and after, the entire exclusion is disallowed. It is not just the 30% that is reassessed; the entire property gets a new base year value.

To use this exclusion successfully, your documentation must be precise. The LLC operating agreement should clearly state the membership percentages and capital contributions in a way that mirrors the pre-transfer ownership exactly.

Beware of Future Transfers: The Hidden Reassessment Triggers

Successfully transferring property into an LLC using the proportional interest exclusion is only the first step. The more difficult challenge is avoiding a reassessment after the property is in the LLC. California law details two main ways that subsequent transfers of LLC membership interests can create a change in ownership for the underlying real estate.

When the initial transfer is excluded under § 62(a)(2), the original owners of the property are designated as "original co-owners" for property tax purposes. This is a special status that becomes central to how future transactions are judged.

Trigger #1: Change in Control (R&T Code § 64(c)(1))

A change in control occurs when a single person or legal entity obtains, directly or indirectly, more than 50% of the interest in the LLC. This acquisition may happen in a single transaction or through a series of steps. When a change in control happens, 100% of the real property owned by the LLC is reassessed.

Example: Change in Control

• Starting Point: ABC LLC, which owns a building in Los Angeles, is owned equally by three members: Alex (33.3%), Ben (33.3%), and Chloe (33.3%). None is an "original co-owner" as they formed the LLC and then bought the building.
• Transaction: An outside investor, David, purchases Alex’s 33.3% interest and Ben’s 33.3% interest.
• Result: Change in control. David has acquired more than 50% (he now has 66.6%) of the total interest in the LLC. The assessor will reassess the entire LA building to its current market value.

Note that this "more than 50%" rule is absolute. Someone acquiring exactly 50% would not trigger a reassessment under this specific rule. This test applies to any person or entity, regardless of whether they were an original owner.

Trigger #2: The Original Co-Owner Rule (R&T Code § 64(d))

This is arguably the most common pitfall for family and small business LLCs. This rule applies specifically to LLCs whose property was excluded from reassessment via the proportional interest exclusion ("original co-owner status").

It states that once more than 50% of the total interests held by the original co-owners have been cumulatively transferred, it constitutes a 100% change in ownership of the underlying property.

It’s a cumulative test that tracks all transfers by the original group over time. It doesn't matter if the transfers are to multiple people or if no single person ends up with a majority interest.

Example: The Cumulative Transfer Trap

• Starting Point: Sarah (50% interest) and Tom (50% interest) transfer their jointly-owned property into ST Properties, LLC, preserving their ownership percentages. They are now "original co-owners." Their tax basis is protected.
• Year 1: Sarah sells 20% of the LLC interest to her financial advisor, leaving her with 30%. The original co-owners have now transferred 20% of their holdings. No reassessment occurs.
• Year 3: Tom sells 15% of the LLC interest to his daughter. The original co-owners have now cumulatively transferred 35% (Sarah's 20% + Tom's 15%). Still no reassessment.
• Year 5: Tom sells another 16% of the LLC interests to a new investor. Now, the total cumulative transfer by the original co-owners is 51% (20% + 15% + 16%).
• Result: Reassessment triggered. As soon as the cumulative transfers by the original co-owners crossed the 50% threshold, a change in ownership occurred. The entire property is reassessed, even though no single person acquired majority control.

This rule requires meticulous tracking of the original co-owners' interests and any transfers, no matter how small.

Advanced Planning and Other Exclusions

Besides the proportional interest transfer, a few other exclusions can be used in your planning.

• Interspousal and Registered Domestic Partner Exclusion: Transfers of membership interests between spouses or registered domestic partners are generally not counted towards the "more than 50%" cumulative transfers test under § 64(d).
• Parent-Child Exclusion (Proposition 19): Proposition 19, passed in 2020, substantially changed the parent-child transfer rules. Previously, parents could transfer their primary residence plus up to $1 million of assessed value of other property to their children without reassessment. Today, the $1 million non-primary residence exemption is gone. The only property that can be transferred without full reassessment is the family's primary residence, and even then, the child must move into the property and use it as their own primary residence within a year. There are also value limitations. While this can still be a valuable tool, its limited application makes it far less flexible for business or investment properties held in an LLC.

Filing Requirements and Last Steps

When an assessable change in legal entity ownership happens, R&T Code § 480.1 requires the entity to file Form BOE-100-B, Statement of Change in Control and Ownership of Legal Entities, with the State Board of Equalization. This form must be filed within 90 days of the change in control or ownership. Failure to file can result in significant penalties.

Because these rules are interconnected and complex, successful long-term planning requires a combination of a carefully drafted operating agreement, diligent tracking of ownership percentages, and awareness of how an owner's personal estate planning might intertwine with company property.

Final Thoughts

Avoiding a property tax reassessment when using an LLC in California boils down to respecting two main principles: maintain strict proportional ownership when contributing property, and diligently monitor all subsequent transfers of membership interests to stay below the 50% thresholds for both "change in control" and the "original co-owner" cumulative transfer rules.

Keeping track of these nuanced state-specific rules, the original co-owner test, and other legal entity considerations requires precision. For tax professionals structuring client transactions or providing advisory, quick and definitive answers are a must. We built Feather AI to give practitioners instant access to citation-backed research across federal and state codes, helping you confirm R&T Code provisions and structuring rules in seconds, so you can advise with confidence.