Forms of Ownership: Entity Ownership

A legal entity is an artificial legal person and it has legal capacity like an individual. It can:

1. Enter into agreements or contracts;
2. Assume obligations;
3. Incur and pay debts and loans;
4. Sue others and can be sued;
5. Be held responsible for its actions; and
6. Contract for purchase, sale, or lease of real property.
Just like a real person, a legal entity’s interests in real property may be owned individually, owned by another legal entity, or held in trust. Some of the most common examples of legal entities holding title to real property in California are:

1. Corporations,
2. Partnerships,
3. Limited liability companies,
4. Joint ventures,
5. Massachusetts business trusts, and
6. Real estate investment trusts.

Change in ownership for legal entities

In general, transfers of corporate voting stock, partnership ownership interests, LLC membership interests, or ownership interests in other legal entities are not changes in ownership of the real property owned by the entity.

The above general rule does not apply to three exceptions:

1. A transfer of an ownership interest in a legal entity that shifts control of the entity;
2. A transfer of an ownership interest in a legal entity by an original co-owner resulting into a cumulative transfer of more than 50 percent of all the interests held by original co-owners; and
3. A transfer of shares in a cooperative housing corporation.
In general, there are two types of transfers involving legal entities that result in a change in ownership for the purpose of Property Tax in California:

1. The transfer of interest in real property to and by a legal entity; and
2. The transfer of ownership interest in a legal entity that owns real property.
The first type of transfer involves a transfer of an interest in real property between legal entities i.e. between a corporation, partnership, LLC, or other entity, etc. The transfers also include transfers between a legal entity and its shareholders.
The second type of transfer involves transfer of ownership interest in a legal entity. The real property is in ownership of the legal entity before and after this type of transfer. Only the ownership interests of the legal entity change.

Both type of transfers trigger a change in ownership of the real property owned by the legal entity. Therefore, the property held by the legal entity attracts reassessment based of change in ownership.

Illustration

Mr. Arthur Andrews, Mrs. Ava Andrews, and their daughter Ashley Andrews owns 51%, 39% and 10% shares in a legal entity. The legal entity owns a real property worth $660,000. Who owns the legal entity? Who controls it? Who owns the real property? And who controls the real property? 

What should Mr. Andrews do if he wants to shift the control of the property to his wife, Ava?

The situation is best explained using a diagram:

Diagram 01

Mr. Andrew Arthur 51% Shares Mrs. Ava Andrew 39% Shares Miss Ashley Andrew 10% Shares	----	Family of Mr. Andrew Arthur owns the legal entity.
­ I
Ownership of legal entity
­ I
Legal Entity	----	The legal entity owns the real property
­ I
Ownership of Real property
­ I
Real Property	----	The real property to be assessed for Property Tax.

Arthur Andrews, his wife, and his daughter owns the legal entity as shown in the diagram. However, effective control on the administration of the legal entity requires ownership of more than 50% share. Therefore, Mr. Andrews controls the legal entity; he has 51% shares in ownership of the entity.

If Mr. Andrews wants to shift the control of real property to his wife, Ava, he will have to transfer 12% or more of his shares in the legal entity to her. Mrs. Andrews will have more than 50% shares in the legal entity then and she will effectively control the property owned by the legal entity. In such transfers of control as transfer of ownership of a legal entity, there is no change of ownership of a real property in strict sense of such a change. However, effective control of the real property changes hands from one person to another, namely from Arthur Andrews to his wife Ava Andrews.
The legal entity owns the real property, but it has its own owner controlling it – Mr. Andrews. Thus, Mr. Andrews controls the property without having a direct ownership of the property.

The county assessor understands this possibility of control through legal entity. The Revenue and Taxation Code allows the county assessor to treat this type of indirect control and its transfer as ownership and change in ownership respectively.

Illustration

Zara owns 60% of the voting stock of the Asian Logistics Corporation. The Asian Logistics Corporation owns three warehouse in California worth $3.0 Million, $3.2 Million and $2.0 Million. The current fair market value of these warehouses is about ten times more than the acquired values of the warehouses in 2007. Zara wants to leave the country after selling voting stock to her husband, Smith, and one of her business fellow, Nathan. Nathan and Smith already have 30% and 10% voting stock of the corporation. Which of the following options will not trigger reassessment of the underlying property of the corporation: 

1. Zara transfers 60% voting stock to Nathan?
2. She transfers voting stock to Smith and Nathan 30% each?
3. She transfers 45% voting stock to Smith and 15% to Nathan?

In option 1, the control of the corporation will be transferred to Nathan and the warehouses owned by the corporation will be reappraised. Since, the fair market values of these warehouses are about ten times larger than there acquisition values in 2007, Property Tax increase will also be huge.

The Option 2 will also produce the same results.
In Option 3, the control of the corporation will be transferred to Smith, her spouse, the change in ownership will qualify for inter-spousal transfer exclusion.

Illustration

Three brothers, Joseph, Jose, and Jeremy created a partnership for starting a retail store in a rented building. Subsequently, the partnership purchased the store’s land and building. Joseph owns 51%, Jose owns 48%, and Jeremy owns 1% of the partnership. The partnership has a continuing clause so that the partnership does not terminate if any of the brothers dies. 

After two years, Joseph died in an accident. Upon death, his will gave 10% interest to his brother Jose, and 41% interest to his son David. 

Will the property owned by the partnership be reappraised by the County Assessor?

The control of the partnership has shifted from Joseph to Jose. This change in control is sufficient to constitute a change in ownership and to trigger reassessment of the underlying land and building of the store by the County Assessor.

Forms of Ownership: Joint Tenancy

Perhaps the most confusing type of Individual ownership when it comes to property taxes is Joint Tenancy, which is different from Tenancy in Common discussed in an earlier post.

Joint tenancy

Like Tenancy in common, joint tenancy is also a form of concurrent ownership in real property. However, joint tenancy is characterized by equal undivided interests in property. If the interests of the owners are not equal, it will not be a joint tenancy.

In the joint tenancy form of ownership, the owners are called co-owners, co-tenants, or joint tenants. A joint tenant has an equal share of the property and is entitled to the simultaneous possession of real property.

A joint tenant has a right of survivorship. This means that upon death of the joint tenant, his or her interest in the property is equally divided and transferred to the remaining joint tenants. There is no need to transfer the interest of a deceased joint tenant. The transfer of interest occurs automatically by operation of law.

Since, the property in joint tenancy transfer automatically on death of a joint tenant, there occurs a change in ownership when a joint tenant dies. Subject to conditions, this change in ownership on death of a joint tenant may or may not result into reappraisal of property held as joint tenancy.

Illustration

Sheila, Sara, and Shirley acquired property in 2000 as joint tenants. Sara died in 2002 and Shirley died in 2006.1. What is the share of property transferred in 2002, and 2006?2. What percentage of ownership each survivor had in 2002, and 2006?

At the time of acquiring property, Sheila, Sara, and Shirley were joint tenants; therefore, each of them has an undivided 1/3 interest in the property.

The death of Sara in 2002, resulted in a change in ownership of 1/3 of the property i.e. Sara’s share.

When Sara died in 2002, her joint tenancy interest automatically passed equally to Sheila and Shirley. They were remaining joint tenants. Each of them had an undivided 50 percent interest in property.

When Shirley died in 2006, her joint tenancy interest automatically passed entirely to Sheila. She automatically became the sole owner of the property.

The death of Shirley in 2006 resulted in a change in ownership of 50% of the property i.e. Shirley’s share in 2006.

Joint tenancy and change in ownership

The creation, transfer, and termination of a joint tenancy interest are changes in ownership in the interest transferred. Upon a change in ownership of a joint tenancy interest, only the transferred interest is reappraised.

Illustration

Identify change of ownership and the extent of change in ownership for the purpose of reappraisal in following cases:

1. Mr. Salmon and his wife Sally purchased property as joint tenants from Angelina.

2. Julia and David Bond were joint owner of property. They sold the property to Kelly and Natalia as joint tenants. 

3. Cara Edwards and Hugh Crawford were joint owners of property. Cara sold her share to David.

In situation at serial No. 1, the transfer is a change in ownership of entire (100%) property.

In situation at serial No. 2, the transfer is also a change in ownership of entire (100%) property.

In situation at serial No. 3, the transfer is a change in ownership of ½ (50%) share sold by Cara to David.

All three changes in ownership will be appraised to the extent of transfer of share unless an exclusion applies.

Illustration

Maria owns property as a sole owner. She transfer her property to herself and her friends Sally and John as joint tenants. Is it a transfer for the purpose of Property Tax? Will it trigger reappraisal?

The transfer to herself and her friends as joint tenants gives Maria the status of original transferor. The property stands transferred, but it will not be reappraised. The original transferor exclusion will apply.

There are several advantages of obtaining original transferor status including exclusion i.e. no reappraisal despite transfer of the property.  In addition, the transaction that creates the status of the original transferor and subsequent transfers to others do not result in a change in ownership as long as original co-owner is on title.

Co-owners and joint tenants can obtain original transferor status in two ways:

1. When the co-owners transfer property held as tenants in common to themselves and others as joint tenants without adding an additional owner from outside as joint tenant; and

2. When the joint tenants transfer their joint tenancy interests to their revocable trusts for the benefit of all of the other joint tenants i.e. all of them are beneficiary.

Illustration

Kelly is the sole owner of a property worth $600,000. Due to pressing financial need, she deeds the property to herself, Kales, and Somali as joint tenants. Kelly is an original transferor, and Kales and Somali are other than original transferors.

Subsequently, Kales transfers her interest to Kelly and Somali.

Is the first transfer a change in ownership? Will the subsequent transfer trigger reappraisal or partial reappraisal?

No transfer is change in ownership because these transfers include original transferor as a joint tenant in the resulting joint tenancy. Hence, the original transferor remains on title. Since, there is no change in ownership, there will be no reappraisal of the property.

To create original transferor status, all the transferors must on title to the joint tenancy i.e. they are among the transferee joint tenants. If a transferor is not on title after the transfer, no transferor will obtain original transferor status.

Illustration

Cara and Martha owned a property as tenants in common. The Assessed Value of this property for the year 2012-13 was $ 420,000. They paid $ 4,600 Property Tax in 2012-13. Subsequently, they transferred the property to Martha, Lolita, and Marry as joint tenants.

1. If the fair market value of the property is $810,000, how much Property Tax is to be paid for year 2013-14? Two percent adjustment is applicable. 

2. How much Property Tax will be payable if Cara is among the transferees after the transfer?

In situation 1 Cara is not among the transferees. Therefore, Martha does not become an original transferor. The transferees are merely joint tenants. Since, Martha was previous owner, only the transfer to Lolita, and Marry results in a 2/3 change in ownership. Hence, 2/3 of the property will be reappraised at current fair market value.

In this situation, 1/3 of the property will not undergo a reappraisal. It is 1/3 undivided share of Martha who was a previous owner of ½ share. The old assessed Value is $420,000.

The County Assessor will reassess new value of 2/3 share of Lolita, and Marry at fair market value i.e. 2/3 of $ 810,000.

Assessed Value and Property Tax 2013-14
Share of Martha 1/3 ($420,000 X 1/3)	$ 14,000
Adjustment 2%	$280
Share of Lolita, and Marry 2/3 (810,000X2/3)	$540,000
Total Assessed Value	$554,280
Property Tax @1%	$5542.80

In situation 2, Cara is among the transferees. Therefore, Martha becomes an original transferor. The transferees are joint tenants and original transferor. Here, exclusion of original transferor will apply and no reappraisal will follow.

In this situation, the old Assessed Value will remain applicable. Only adjustment will be 2% for inflation as given in the illustration.

Assessed Value and Property Tax for 2013-14
Previous Assessed Value	$420,000
Adjustment for inflation	$8400
Total Assessed Value	$428400
Property Tax @1%	$4284

One important point to note about original transferor exclusion is that when the interest of the last surviving original transferor is terminated, the entire property will be subject to reappraisal.

Illustration

Sheila, Jack, Thomas and Nina were old college friends. After retirement they wanted to live together in a property owned by Sheila and Jack. In 2000, Sheila and Jack transferred the property to themselves, Thomas, and Nina as joint tenants.

Sheila died in 2010, Thomas died in 2011, and Jack died in 2012.
When will the property be reappraised for Property Tax purpose if there is any need of the reappraisal under the law?

In 2010 when Sheila died, she was an original transferor; therefore, there was no need of reappraisal because of original transferor exclusion.

In 2011 when Thomas died, an original transferor, Jack, was on title; therefore, there was no need of reappraisal because of original transferor exclusion.

In 2012 when Jack died, no original transferor remained on title. Therefore, entire property will be reappraised because original transferor exclusion will not be applicable.

A spouse of an original transferor can also become original transferor if the spouse acquires an interest in a joint tenancy property during the time the original transferor was on title. The spouse will be considered if the spouse acquires an interest in the joint tenancy property by means of a transfer from the original transferor.

Illustration

Callas and Byre were joint tenants and they transferred their property to Callas, Byre, Cara, and Diana as joint tenants. Diana is Callas’ wife.

Who should come off the title to trigger reassessment of the property?

The transfer in the situation is not a change in ownership because transferors Callas and Byre are among the resulting joint tenants as original transferors.

Diana has also become an original transferor because she is wife of Callas and she received her interest by way of a transfer during life time of Callas.

Only Cara is an “other than original transferor”. Therefore, property will be subject to 100 percent reassessment when Callas, Byre, and Diana come off title. When they will not be on title Cara will be the sole owner to face reappraisal of the property.

Avoiding Reassessment and Reporting Changes in Ownership

While using one of the previously discussed exclusions from reassessment is often the best way to avoid an increase in property taxes, they are not always available. There is an additional method available to some owners, called a Base Year Value transfer, that can be used, as well as some cases where a transfer does not trigger a change in ownership at all.

Base Year Value transfers

The California Constitution allows persons who are over the age of 55 or disabled to sell a principal place of residence and transfer the Base Year Value of the property to a new residence. The old property is called the original property and the new property is called the replacement residence. The transfer of base year value from the original property to the replacement residence is subject to certain conditions. The conditions are as follows:

1. The claimant is age 55 or over;

2. The claimant is severely and permanently disabled;

3. The original property of the claimant is sold and reassessed to current market value;

4. The replacement dwelling is purchased or newly constructed within two years of the sale of the original property;

5. Both the new and sold property are in the same county;

6. The replacement dwelling is of equal or lesser value than the original property.

Illustration

Luis, who is over 55, has transferred his current principal residence to Noah. Luis wants transfer the base year value of his residence to a qualified replacement dwelling. The current market value of his principal residence is $500,000. Will he be allowed to transfer the Base Year Value $71,000 of his original property to replacement dwelling if the current market value of the replacement dwelling is $4,500,000? Or $380,000?

Assuming all other conditions are met, he will be allowed to get the Base Year Value transferred if it is $380,000 i.e. less than the current fair market value of his principal residence.

In general, an individual can transfer his or her Base Year Value only once. In addition, if a claimant makes a transfer and his or her spouse is also an owner of the replacement dwelling, the spouse will also be prevented from making a future claim for transfer of Base Year Value. However, if a claimant becomes severely and permanently disabled after using the one-time benefit on the basis of age, the claimant or the claimant's spouse is eligible for a second Base Year Value transfer for disabled persons.

Transfers that are not change in ownership

Some transfers of title to real property are not change in ownership. This is because they do not meet the requirement of the law to qualify as a transfer for the purpose of property taxes. These transfer often involve recorded deeds or other evidence of transfers of real property, but they do not represent changes in ownership. Hence, even if these transfers occur, they do not trigger reassessment real property. These transfers include:

1. Transfer of only bare legal title without the transfer of beneficial interest associated with the property;
2. Transfer to perfect title, or correct a deed for reflecting intentions of the parties;
3. Transfers to create a security interest not coupled with the right to use like a security for a loan; and
4. Transfer for sale and leaseback arrangement as a financing mechanism.

Illustration

The Investment Needs LLC extended a loan amounting to $44,000 to Ms. Sheila Juwan, a young entrepreneur in 2013. As a security, Sheila transferred the title to her apartment worth $90,000 in the name of The Investment Needs LLC, but the apartment remained in her possession and use. If the Assessed Value of her apartment was $20,000 in 2012-13, what will be the new Assessed Value of her apartment in 2013-14?

The property stands transferred in the name of the Investment Needs LLC, but the treatment of the transfer for the purpose of Property Tax is different. The transfer is NOT a change in ownership because its purpose is creation of security interest without beneficial use of the property. Therefore, the Assessed Value of Ms. Sheila Juwan’s apartment will remain $20,000 plus 2% adjustment for inflation i.e. $20,400.

Reporting changes in ownership

The transferees, in cases of changes in ownership of properties, report the changes by filing the Change in Ownership Statement with the County Assessor.

Change in ownership statement

The Revenue and Taxation Code has made you responsible for reporting change of ownership of your property if you are a transferee in case of property transfer. In such cases, as case of change in ownership, you are to file a Change in Ownership Statement (COS). The Change in Ownership Statement is filed with the County Assessor of the county in which your real property is located.

The period of filing a Change in Ownership Statement has also been specified by the code. You must filed the statement:

1. At the time of recording the transfer of property; or

2. Within 90 days of the date of the change in ownership if the transfer is not recorded.

The Change in Ownership Statement contains information important for calculating Assessed Value and effective date of the new Assessed Value. Moreover, it facilitate the County Assessor in understanding the nature of property and transfer to make decision regarding exclusions. The essential information on the Change in Ownership Statement includes:

1. A description of the property;

2. The date of transfer;

3. The parties to the transaction;

4. The amount of consideration paid for the property (if any); and

5. The terms of the transaction.

The owner of real property signs the Change in Ownership Statement under penalty of perjury. However, the signing requirement is not needed if the Change in Ownership Statement accompanies the deed or other transfer document evidencing a change in ownership.

You may have to pay a penalty for failing to file the Change in Ownership Statement. It is because the law authorizes a County Assessor to impose a penalty for failure to file the Change in Ownership Statements.

The Revenue and Taxation Code also requires filing of the Change in Ownership Statement to report changes in control of legal entities owning properties.

County Assessors use the information reported on Change in Ownership statement to determine whether:

1. A transfer is a change in ownership;

2. A change in ownership meets one of the exclusions; and

3. The purchase price reflects fair market value.