Two brothers own a twelve-unit building through an LLC. Their father put it in the entity in 1988. One brother wants out. They agree on a price, the lawyer papers it, and eight months later a supplemental tax bill arrives that is four times what they were paying.
Nobody did anything wrong. They just did it in the wrong order.
The thing worth protecting
California Proposition 13 assesses property at its purchase price, growing no more than 2% a year. A building bought or transferred in 1988 may sit on an assessed value that is a small fraction of what it is worth today.
On a building worth $4 million with a 1988 base year value of perhaps $700,000, and a combined rate around 1.18%, the difference in annual property tax is roughly $39,000 a year. Capitalized at a 5.5% cap rate, that low basis is worth about $710,000 of building value.
That is not a tax detail. For long-held family property it is frequently the single most valuable thing about the asset, and it can be destroyed by a signature.
The general rule, and the two exceptions that matter
The starting point is friendly. Under Revenue and Taxation Code section 64(a), transferring ownership interests in a legal entity — LLC membership interests, partnership interests, corporate stock — is not treated as a transfer of the real property the entity owns. The property is not reassessed.
Then come the exceptions.
Exception one: change in control, section 64(c). When any one person or entity obtains more than 50% of the ownership interest in an entity, all California real property owned by that entity and its subsidiaries is reassessed to current market value.
Read the statute's language carefully, because it is broader than people expect: it captures "any purchase or transfer of 50 percent or less of the ownership interest through which control is obtained." The size of the transfer is irrelevant. What matters is whether it carries someone across the line.
This is the partner-buyout landmine in one sentence. A 40% partner who buys an additional 15% now holds 55%, and the entire building is reassessed. The transaction was 15%. The consequence is 100%.
Exception two: cumulative transfers by original co-owners, section 64(d). Where property was contributed into the entity using the proportional-interest exclusion — common when a family moved a building into an LLC without triggering reassessment — the contributors become "original co-owners." If those original co-owners cumulatively transfer more than 50% of the entity's interests, the property is reassessed.
The word to underline is cumulatively. This count runs across all transactions, over all years, with no time limit.
The two exceptions have different scopes. Section 64(c) reassesses everything the entity owns. Section 64(d) reassesses only the property that was previously excluded. If a single transaction does both, 64(c) governs and the broader result applies.
The filing nobody remembers
When a change in control or a reportable change in ownership occurs, form BOE-100-B is due within 90 days, filed with the State Board of Equalization directly — not the county assessor.
The penalty for failing to file is 10% of the taxes on the new base year value, or 10% of current year taxes if no change actually occurred but filing was required. That second clause catches people who assumed no filing was needed because they concluded no reassessment happened.
How buyouts get structured around this
We are not attorneys and this is not legal advice. But the shape of the planning is worth understanding before you walk into a lawyer's office, so the conversation starts in the right place.
Stay under the line. If the exiting partner's interest would push the buyer over 50%, the interest can sometimes be divided among multiple buyers so nobody individually crosses. Two remaining partners at 30% each buying half of a 40% partner's stake land at 50% each — under, not over. Whether this works depends on attribution rules and on who actually controls the entity, which is exactly the kind of question that needs real counsel.
Have the entity redeem rather than a partner purchase. A redemption changes the arithmetic of who holds what. It also changes the cash source, which has its own consequences.
Count what has already been transferred. Before any new transaction, the section 64(d) running total has to be reconstructed from the entity's full history. On a building held since the 1980s this can mean digging through decades of operating agreement amendments. Tedious, and much cheaper than the alternative.
Check the timing against everything else. A buyout often needs financing, and the loan will have its own requirements about ownership and control. Those can pull in the opposite direction from the tax planning.
What the buyout is actually worth
Separate from the tax, the price question.
A minority interest in a private LLC that owns one building is not worth its pro-rata share of the building's value. It is worth less, because the holder cannot force a sale, cannot access the equity, and cannot easily sell to a stranger. Valuation professionals apply discounts for lack of control and lack of marketability, which combined commonly run 20% to 35% for this kind of asset — though the number is specific to the operating agreement and the facts.
Whether the exiting partner accepts a discounted number is a negotiation, not a formula. But both sides should at least know that pro-rata is the ceiling, not the starting point, and why.
The other half of the question is what the remaining partner is actually buying. More of a building that throws off 4% and has a loan maturing in three years is a different purchase from more of a building with fifteen years of fixed debt and a rent roll 40% under market. We would want to run the refinance before anyone agrees to a price, because the buyout usually has to be financed and the financing determines what is affordable.
And if the transfer is to family
If you are thinking about transferring to children rather than a partner, the rules changed and not in your favor. Proposition 19, operative February 16, 2021, eliminated the parent-child exclusion for rental and investment property. It now applies only to a principal residence that becomes the child's principal residence, and to family farms — and even then it is capped.
An LA fourplex left to a child is fully reassessed to market value. We have written a separate note on what that means for succession planning, because it deserves more room than a paragraph.
What we do
When an owner tells us a partner wants out, the first thing we ask for is the entity's ownership history — not the current cap table, the history. Then we model the buyout two or three ways and show what each does to the property tax bill, the loan, and the cash required.
Then we send you to your attorney and your CPA with a specific question rather than a general one. That is a much cheaper hour.
Reassessment rules are technical and fact-specific, and the consequences of getting them wrong are large and permanent. Nothing here is legal or tax advice. Talk to a California property tax attorney before transferring any interest.
Sources
- California Revenue and Taxation Code section 64
- California Board of Equalization, Legal Entity Ownership Program
- California Board of Equalization, LEOP penalties
- California Board of Equalization, Proposition 19