Tax Nightmares: Monster Property Tax Increases Lurk Behind Transfers of Partnership Interests

While you shouldn’t be scared to transfer an interest in an entity, you should proceed with caution. If not done with careful analysis, huge increases in annual property taxes can result.

Today, entities such as LLCs and partnerships often own California real property.  The members or partners of such entity should pay special attention to all transfers of any interest of the entity.  Without careful tracking of each transfer, a transfer could end up triggering reassessment of the real property owned by the entity – something no real property owner ever wants to happen.  The other partners and members will also be shocked by unexpected increases.

How can you avoid such unexpected reassessments?  Through careful planning and attention to all transfers of your entity’s interests. 

Tasked with assuring each county fairly reassess property taxes across the state, the California State Board of Equalization (the “SBE”) requires a Form BOE-100-B (the “Form”) to be filed whenever an entity either owns or leases an interest in a parcel(s) of real property located in California and there is a ‘change in control’ or a ‘change in ownership’ of an entity.[1]  The entity must file the Form within 90 days of the change in control or ownership.[2] 

A change in control occurs when any person or entity obtains more than a 50% ownership interest in an entity that owns real property in California.[3]  For example, if a partner owns 45% of an entity that holds California real estate and inherits a 15% interest in that entity from that partner’s mom upon her death, the partner goes from owning a 45% interest in the entity to owning a 60% interest in the entity.  In this example, a change in control has occurred, and the property owned by the entity is subject to reassessment.  A change in control is triggered when a person or entity goes from having a 50% or less interest in the entity to having more than a 50% interest in the entity.

A change in ownership occurs when cumulatively more than 50% of the original co-owners’ interests in an entity that owns real property in California is transferred if the property was not purchased by the entity and reassessed at the time of the purchase. [4]  Original co-owner status is created when the transfer of the real property owned by the entity “is excluded from reassessment under Revenue and Taxation Code (“R&TC”) Section 62(a)(2) in a prior transaction.” [5]  After a parcel of real property has been transferred, and such transfer will qualify for an exclusion from reassessment under R&TC Section 62(a)(2), the person(s) or entity(ies) having ownership interests in the entity at the time of the qualifying the transfer are considered to be ‘original co-owners’, and any subsequent transfers of the interest held by an original co-owner must be tracked.[6]  When the transfers of original co-ownership interests for an entity cumulatively exceed 50%, the entity is deemed to undergo a change in ownership, and the real property is, therefore, subject to reassessment.[7]

Transfers can occur in many ways and every transfer of an entity’s interest should be carefully tracked by the entity so that the Form is timely filed. Some examples of a transfer include, but are not limited to, the following:

• Transfers from parents to their children;
• Transfers from grandparents to their grandchildren;
• Transfers into or out of a trust (whether revocable or irrevocable);
• Gifts of an entity interest;
• Sale of entity an interest; or
• Death of the interest holder.[8]

Certain transfers are considered ‘excluded transfers’ for purposes of reassessment of the real property, but should be kept track of by the entity as they do still require a timely filing of the Form with the SBE.[9]  It is important to note that even if you believe a transfer(s) is an excluded transfer you still must file the Form by the 90-day deadline.  Examples of such transfers include, but are not limited to the following:

• Transfers between spouses or registered domestic partners;
• Transfers into or out of qualifying trusts;
• Proportional interest transfers; or
• Transfers of interest’s received from an original co-owner that have already been counted.[10]

The Form must be filed with the SBE within 90 days even if an exclusion from reassessment is applicable in order to avoid the imposition of a penalty.[11]  The penalty for not filing the Form within 90 days of a change in control or ownership is 10% of the taxes applicable to the new base year value of the real property following the reassessment.  In the event you have a transfer, but no change in control or change in ownership occurs, the penalty for not filing within 90 days of the transfer is 10% of the current year’s taxes on the real property.[12]

This is a complex and ongoing concern for entities which could result in expensive consequences.  If you need help completing and filing Form BOE-100-B, determining if your entity has undergone a change in control or change in ownership, or want help in planning entity transfers to minimize reassessment of your real property contact attorneys at Berliner Cohen, LLP for assistance. And remember to think twice before making a transfer of an entity interest.[13]