Lydia M. Lim
October 11, 2012

California’s Proposition 13 provides for the reassessment of real property upon a “change in ownership” or “change in control”, the occurrence of which determines the “base year” for the purposes of property tax assessment. The base year value of the property remains with the property, until a subsequent “change in ownership” or “change in control” occurs. Recently the reporting which must be made upon a “change in ownership” or “change in control” of real property has been revised as it applies to entities.

A “change in ownership” is the more frequent and obvious event, which triggers a property tax reassessment. It occurs when the there is a transfer in the real property. In addition to a conveyance of a fee interest in real property, a “transfer in ownership” also includes transfers of rights in regards to oil, gas and mineral rights, the creation of certain joint tenancies and tenants-in-common, creation of long-term leasehold interests and life estates, and the vesting of real property when a revocable trust becomes an irrevocable trust. These events are reported to the local assessor using a Preliminary Change of Ownership Report.

A less obvious transfer occurs when there is a “change in control” within a legal entity which is the owner of real property. In this situation there is no change in the legal owner of the property-the entity still owns the property but there is a change in the ownership of the entity. A “change in control” occurs when 50% or more of the ownership of an entity is transferred. The 50% threshold can be reached by the cumulative transfers of stock, membership interests, or other ownership rights of multiple stakeholders in an entity.

If a transfer is proportional, no change in control has occurred. For instance, if a property is owned by Jack, Jill and Bob, with Jack having a 25% interest, Jill having a 30% interest, and Bob having a 45% interest, and the three transfer the property into a new company (“New Co.”), where they have the same proportional interests in New Co. as they held in the property, then no change in control has occurred.

However, if a property is held in an entity and Jack transfers his 25% interest and Jill transfers her 30% interest, then more than 50% of the interests in New Co. have been transferred, change in control has occurred, and the entity’s property is subject to reassessment. New Co. is required to file a Change in Ownership Statement (Form BOE-100B) with the State Board of Equalization within 90 days from the date of the change in control. The penalty for failing to comply is 10% of the taxes applicable to the new base year value reflecting the change in control of the real property owned by the entity.

There also is a mechanism in place whereby the Franchise Tax Board and local tax assessors work together to identify properties where a change of ownership may have occurred. Upon identifying such a property, the Franchise Tax Board will request that a Change of Ownership Statement be filed. The penalty for failure to comply with a request by the Franchise Tax Board’s is 10% of the taxes applicable to the new base year value reflecting the change in control of the real property owned by the entity or 10% of the current year’s taxes on the property if no change in control occurred.

“This information is for educational purposes only and not intended to constitute legal advice. Every project and property is unique. Please seek legal counsel for advice specific to your project.”