Multiple Properties – Tax Benefit of LLC (Pre-Death Planning Opportunity Only)

Under California Proposition 58, the Parent to Child Exclusion for transfer of the pre-exisiting Proposition 13 tax base is unlimited for one residential property, plus one million ($1,000,000.00) per parent spouse for non-residential property (maximum two million [$2,000,000.00] if two parents).

For an owner of an investment property or properties exceeding two million, tax planning for purposes of preserving the pre-exisiting Proposition 13 tax base can be accomplished through the use of a business entity, e.g. LLC or L.P.

The tax re-assessment rules for a business entity holding real property differs in that it depends on 1) a change of control of more than 50%; or 2) more than 50% of the original co-owners change.

Importantly, any Business Entity planning and structuring regarding the investment property is only possibly before the owner dies.

As time goes on there will be more LLCs created as more real properties will be worth one million or more and more tax assessment will catch up to that threshold.

For a consultation regarding this topic please contact the Law Offices of Hanlen J. Chang.

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For Sale by Owner – Alternate Hourly or Flat Fee Service

For Sale by Owner (FSBO) is suitable for situations where the seller has already found a buyer. This alternative hourly rate or flat fee service can save costs compared to hiring a realtor who will be compensated on commission.

A Lawyer-Broker can assist with preparing the real estate documents and arranging for escrow. This service requires an average of 11-24 hours.

Common situations include:

  • Tenant seeking to buyout Landlord;
  • Buyout of a Joint Tenant;
  • An Owner who wants to sell without a realtor.

A Realtor service is more suitable when there is no a pre-determined buyer and marketing is required.

If you believe your situation may benefit from a For Sale by Owner alternative hourly or flat fee service, please contact the Law Offices of Hanlen J. Chang for more information.

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San Francisco Bay Area Housing Supply to Remain Low For Foreseeable Future

If you were already discouraged by low housing inventory and supply in the San Francisco Bay Area, there is little reason to hope that it will improve for the foreseeable future.

Some factors include:

  • The two percent (2%) per annum Proposition 13 tax cap that encourages long term holding of California Real Estate;
  • New Federal Tax Law limiting mortgage deduction to $750,000, but grandfathering in pre-existing home owners $1,000,000 mortgage deduction;
  • New Federal Tax Law limiting State and Municipal real property tax deduction to $10,000 per year;
  • Rising Interest Rates making mortgage financing more expensive.

Other factors influencing selling v. holding include suitability as rental property and estate planning desire to pass on the real property “in kind” to your children who may inherit the pre-existing lower tax base.

In summation, why sell your home, if buying another home in the same area will significantly increase your financing costs and taxes.

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The Dangers of Naming a Foreign Relative a Co-Owner On Title to U.S. Real Property

A common occurrence is for a U.S. citizen or permanent resident to buy U.S. real estate with the assistance from a Non-Resident Alien (“NRA”) relative such as a parent, sibling, or grandparent.

Usually the initial contact person will be a real estate broker. In California, the vast majority of real estate brokers will use standard California Association of Realtor (“CAR”) forms.

It is important to know that the standard CAR disclaims  responsibility for any legal or tax advice. This obligation and risk is contractually put onto the purchaser or seller, meaning the purchaser or seller is obligated to separately consult and arrange for any legal or tax advice.

Since the real estate broker is being paid on commission, his or her main interest will be to complete the sale of the property as soon as possible. Any due diligence regarding the condition of the property, tax planning, or consideration of legal implications will be viewed by the realtor as a potential risk of causing the sale to be delayed or fall through.

One question that will have to be decided at the time of purchase is who and how to take the title to the real property. Often the NRA relative who is contributing money will want to have some control or interest and be named as co-owner to the real property.

The impact of this decision, without proper legal and tax planning, runs a significant risk of a surprise tax hit or legal claims. Depending on the objectives there may be alternate solutions to meet the objectives of the contributing NRA relative.

The best time to properly structure an acquisition or sale of California real property is prior to the acquisition, or immediately thereafter.  As one builds equity over time, the longer the wait, the higher the risk of the tax implication. Another factor is how the property is transferred, by gift or by sale, or a combination of both.

If you are a foreign investor interested in acquiring California real property, there are significant and complex tax, legal, and business cost considerations. You do not want to be caught unaware and wind up paying more money than is necessary, with less remaining for your family members.

For additional information on structuring a California real property investment, please contact the Law Offices of Hanlen J. Chang.

Additional information can also be found in this prior post.

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California Real Property Tax

Under California Proposition 13, each County in California collects an annual real property ad valorem tax not to exceed 1% based of the value at time of the purchase with annual increases restricted to an inflation factor not to exceed 2% per year.

As the rate of return of real property tends to grow faster than the 2% cap, over time the lower tax base becomes a valuable asset.

Proposition 13 disincentivizes sales in instances where the assessment value is lower than the market value. This is because selling and purchasing a comparable real property at the same price point would result in a significantly higher annual assessment.

For individual real property owners, there is a reassessment exemption for a transfer to a child. In addition, those age 55 or older can transport the preexisting proposition 13 rate to a new property of equal of lesser value. Only certain counties participate in the age 55 and older scheme. For non-residential property, each person has a one million dollar exemption. Anything in excess will result in a partial reassessment. For residential property there is no dollar limit, but only one property can qualify as such.

For real property held and owned by a legal entity (e.g. LLC), a change of majority control or ownership results in a reassessment. This has encouraged fractionalized ownership where no one person owes more than 50%.

Assuming real property values exceed 2% growth over time, Proposition 13 has an elevated impact for long-term investors who need to be extra cautious when structuring ownership and title upon acquisition, and prior to lifetime dispositions and death. Failure to do so can result in otherwise avoidable partial or total reassessment.

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