Documentary Transfer Tax Exemption and Reassessment California LLC Real Estate Capital Contribution
Transferring my real estate property in California to my California LLC has to be done properly, otherwise, I might trigger Documentary Transfer Tax and tax reassessment on my property value, which might become an expensive process.
1- Registering Capital Contribution
I must record the Capital Contribution of Real Property on my California LLC Operating Agreement
2- Preliminary Change of Ownership Form
This form is highly important, because besides reporting the transfer details, in Part 1, I must check "M. This is a transfer between parties in which proportional interests of the transferor(s) and transferee(s) in each and every parcel being transferred remain exactly the same after the transfer." to obtain the tax reassessment exclusion.
The form that I will use will depend on the county where my property is located since every county has its own form yet they have the same content.
Proportional ownership interest transfer exclusion:
Reassessment is limited to the percentage interest in real property transferred unless an exclusion from change in ownership is applicable.
Section 62(a)(2) of the Revenue and Taxation Code provides that any transfer of real property between an individual or individuals and a legal entity, or between legal entities, that results solely in a change in the method of holding title to the real property, and in which the proportional ownership interests of the transferors and transferees in each and every piece of real property transferred remain the same after the transfer, is excluded from a change in ownership.
3- Quitclaim Deed VS Grant Deed
If I use a Quitclaim Deed when transferring the real property to my LLC I make no warranty on the property status, meaning I make no warranty that the property has no mortgage, or liens, etc. This Quitclaim deed works well between related parties. In contrast, if I use the Grant Deed I make a warranty that I own the property and it is free of liens, mortgages, etc.
4- Documentary Transfer Tax Exemption
On the Deed (Quitclaim or Grant) I must add the R&T exemption that applies for the Documentary Transfer Tax Exemption, in my case it is Conveyance from Individual(s)/Legal Entity(ies) to Individual(s)/Legal Entity(ies) Where the Grantors and Grantees Are Comprised of the Same Parties, and Parties Continue to Hold the Same Proportionate Interest. “The grantors and the grantees in this conveyance are comprised of the same parties who continue to hold the same proportionate interest in the property, R & T 11925(d)"
About the author: Jean Franco Fernández Clark. Corporate and International Tax Lawyer from Nicaragua, Central America. Speaks English, Spanish, French, Italian, Russian. 学习普通话
Disclaimer: Nothing in this article shall be considered legal, financial, or tax advice. If you wish to obtain advice you must address a licensed tax consultant or attorney. The publication of this article is for information purposes only and the content in this article comes from personal experiences and it is not by any means a legal or tax advice. Information may not be updated or correct.