The Californians and Prop 19

[Elliott]

I bought a house in Las Vegas five years ago and my neighbors house has sold three times in the last two years. Yet, except for a few weeks, no one has lived there. Being a curious, appraiser-type, I tried to figure out what was going on with the ownerships. The sales were always to LLCs, exchanges, and eventually circled back to two houses in Bel Air with values of about $5 million. The owners of the Bel Air houses are typically over 70-years old and they have heirs in their 50's.

As I understand it, Prop 19 was going to prevent the step up of property taxes (Prop 13). On these Bel Air houses a protected house might have $5000 a year in property taxes, while a similar priced house might have $8,000 PER MONTH in property taxes, so they carve up ownership prior to the owners death to keep the lower property taxes.

I found this when I searched for Prop 19 and loopholes:

"The Change in Ownership Rules

The Change in Ownership Rules apply when real property is transferred to an LLC in a transfer that is excluded from reassessment. For example:

Sister and Brother inherit Greenacre from Parents (50/50).
Parents of Sister and Brother bought Greenacre decades ago for $10,000. It is now worth $1,000,000.
Sister and Brother pay peanuts in property taxes.
Greenacre is situated on a beachside cliff in a college town. Worried about liability, Sister and Brother transfer their 100% interest in Greenacre to Greenacre LLC.
Sister and Brother own all membership interest in Greenacre LLC (50/50), so this transfer is a “proportional interest transfer” that is excluded from reassessment under R&TC 62(a)(2).

Proposition 19, enacted in the November Election, eliminates the parent-child exclusion from property tax reassessment for transfers of rental property from parent to child. As a result, real estate investors are looking for new ways to transition real estate to the next generation in a tax-efficient manner. The rules applicable to LLCs under the California Revenue & Taxation Code (R&TC) can provide a great loophole for avoiding higher property taxes.

Real property owned by an LLC is either subject to the Change in Control Rules under R&TC 64(c) or the Change in Ownership Rules under R&TC 64(d). Under those separate rules, real property owned by an LLC is reassessed whenever there is a change in control or a change in ownership. The manner in which an LLC acquires real property determines which set of rules to apply.

It is easy to see how the Change in Control Rules can keep the property tax basis low for generations. Absent Grandchild C’s blunder, the property tax basis of Greenacre could have been kept low for at least one more generation."

https://www.hollisterlawoffice.com/the-LLC-loophole-in-the-aftermath-of-proposition-19/

SNL use to have a bit called The Californians that poked fun of those living in the Golden State. The rich always seem to have lawyers find the loopholes.

 

[TerryRohrer]

I bought a house in Las Vegas five years ago and my neighbors house has sold three times in the last two years. Yet, except for a few weeks, no one has lived there. Being a curious, appraiser-type, I tried to figure out what was going on with the ownerships. The sales were always to LLCs, exchanges, and eventually circled back to two houses in Bel Air with values of about $5 million. The owners of the Bel Air houses are typically over 70-years old and they have heirs in their 50's.

As I understand it, Prop 19 was going to prevent the step up of property taxes (Prop 13). On these Bel Air houses a protected house might have $5000 a year in property taxes, while a similar priced house might have $8,000 PER MONTH in property taxes, so they carve up ownership prior to the owners death to keep the lower property taxes.

I found this when I searched for Prop 19 and loopholes:

"The Change in Ownership Rules

The Change in Ownership Rules apply when real property is transferred to an LLC in a transfer that is excluded from reassessment. For example:

Sister and Brother inherit Greenacre from Parents (50/50).
Parents of Sister and Brother bought Greenacre decades ago for $10,000. It is now worth $1,000,000.
Sister and Brother pay peanuts in property taxes.
Greenacre is situated on a beachside cliff in a college town. Worried about liability, Sister and Brother transfer their 100% interest in Greenacre to Greenacre LLC.
Sister and Brother own all membership interest in Greenacre LLC (50/50), so this transfer is a “proportional interest transfer” that is excluded from reassessment under R&TC 62(a)(2).

Proposition 19, enacted in the November Election, eliminates the parent-child exclusion from property tax reassessment for transfers of rental property from parent to child. As a result, real estate investors are looking for new ways to transition real estate to the next generation in a tax-efficient manner. The rules applicable to LLCs under the California Revenue & Taxation Code (R&TC) can provide a great loophole for avoiding higher property taxes.

Real property owned by an LLC is either subject to the Change in Control Rules under R&TC 64(c) or the Change in Ownership Rules under R&TC 64(d). Under those separate rules, real property owned by an LLC is reassessed whenever there is a change in control or a change in ownership. The manner in which an LLC acquires real property determines which set of rules to apply.

It is easy to see how the Change in Control Rules can keep the property tax basis low for generations. Absent Grandchild C’s blunder, the property tax basis of Greenacre could have been kept low for at least one more generation."

https://www.hollisterlawoffice.com/the-LLC-loophole-in-the-aftermath-of-proposition-19/

SNL use to have a bit called The Californians that poked fun of those living in the Golden State. The rich always seem to have lawyers find the loopholes.

There isn't a law or regulation written that can prevent gaming! I worked in ag lending for a bit in the 1980s. A new farm bill came out promising caps on handouts to a certain size of operation. Immediately, the number of farms almost doubled as husbands and wives became separate operators (on paper only). The 535 members of congress, and the army of bureaucrats writing rules, were no match for three farmers in a coffee shop. Nor any other party intent on getting something for nothing!

 

[Fernando]

When one changes to a LLC, isn't that a new entity? Thus assessor will reassess the property one time. Maybe not if old estate gift laws still apply.

 

[Charles West]

I've got a bizarre situation in my general neighborhood. There is a sole duplex that has been all but abandoned since I can remember, both units have been vacant all this time which must be over a decade, the landscaping is dead, and it looks like hell. The neighbors must be livid. Don't know what the situation is other than the owner lives in nearby El Dorado Hills. The lost income must be astonishing.

 

[CenCoastApr]

Prop 19 was a bait and switch scam. Shocking, I know. It was sold to the voters as allowing older property owners to bring their older (and lower) base year value to anywhere in the state and even allow for an upgrade in value (with the additional value above a given percent to be tacked on). It was also billed as a warm fuzzy because this all so benevolent provision was to apply to those who lose their home in a wildfire. The parent to child reassessment exclusion which allowed people to give their property to their children without a big grab from the state government was gutted. Now, parents can only leave their primary residence to the kids. That being said, in order to keep the exclusion, children must declare it as a primary residence within a year of the transfer. The bare bones of the bill was passed by the voters. Then AFTER that, Sacramento got to work actually writing the full law and filling in the convoluted gaps. It is a complicated nightmare for taxpayers and assessors. I am glad I left the assessor when I did.

 

[Fernando]

Prop 19 was a bait and switch scam. Shocking, I know. It was sold to the voters as allowing older property owners to bring their older (and lower) base year value to anywhere in the state and even allow for an upgrade in value (with the additional value above a given percent to be tacked on). It was also billed as a warm fuzzy because this all so benevolent provision was to apply to those who lose their home in a wildfire. The parent to child reassessment exclusion which allowed people to give their property to their children without a big grab from the state government was gutted. Now, parents can only leave their primary residence to the kids. That being said, in order to keep the exclusion, children must declare it as a primary residence within a year of the transfer. The bare bones of the bill was passed by the voters. Then AFTER that, Sacramento got to work actually writing the full law and filling in the convoluted gaps. It is a complicated nightmare for taxpayers and assessors. I am glad I left the assessor when I did.

Nice summary. My wife was talking about buying nicer house and keeping low assessed value. I'm happy with our home and no need to buy a bigger home. The kids will be moving out on their own.
Prop 19 was a scam for governments to get more revenues and Realtors. Realtors supported it because the heirs will less likely hold on to their inherited properties and will sell giving more business to Realtors.