6 ms·

What's the problem with this exactly?

by duncan-donuts 3y ago

88913527 3y ago
In some areas, properties get a tax reassessment after a sale. The LLC abstraction avoids the reassessment.
- wahern 3y ago
  California, at least, treats as a change in property ownership when a more than 50% interest in the legal owner (i.e. corporation, LLC, trust, etc) changes. The rules don't completely address the problem. For example, I think some buildings are owned by consortiums so that nobody has more than a 50% stake. But that limits their ability to easily make management decisions; there's a cost to that structure. You definitely still see buildings sold out-right, so it's not like every building in California is owned by an LLC just to avoid reassessment.
  - hedora 3y ago
    The last time I checked, the 50% change in ownership had to be within one year in order to trigger the prop 13 revaluation (at least for commercial real estate). So, you transfer your corporate campus to an LLC, then sell 33% of it to a buyer this year, and agree to let them "run" the LLC, effective immediately. Next year, you sell another 33% of the LLC, and the year after, the last 33%. What I don't understand is why this isn't standard practice for residential properties owned by individuals. I assume you could use a combination of escrow accounts and collateralized loans to make the transaction mostly indistinguishable from wiring 100% of the money on the day of the sale. (I am not a lawyer or an accountant.)
HarryHirsch 3y ago
Prop 13 in California. Its purpose was to lower the tax burden on commercial real estate in perpetuity, and they did this by throwing in a bone for Grandma.
gopher_space 3y ago
Off the top of my head: value is tied to appraisal which happens during a sale. Land values wouldn't change to reflect local demand and this could depress tax revenue. You'd probably be able to get away with some foolishness regarding the building condition.
- lotsofpulp 3y ago
  This is only true for very few markets that have ridiculous subsidies for land owners via laws that limit property tax, such as California. Most other places re-assess all property values on an ongoing basis and charge you accordingly.
  - mixdup 3y ago
    >Most other places re-assess all property values on an ongoing basis and charge you accordingly Those reassessments are based on market activity over the preceding year. Property changing hands without actually being a real estate transaction does not generate market data for the assessors to use
Centigonal 3y ago
Title transfer/recordation is taxed in lots of jurisdictions, this is a tax loophole that only people savvy enough to buy properties with LLCs can use. This is highly dependent on which state you're in though.
- hammock 3y ago
  > this is a tax loophole that only people savvy enough to buy properties with LLCs can use ? Tennis is a sport that only people savvy enough to buy tennis balls can play
eli_gottlieb 3y ago
It's a tax dodge.

What's the problem with this exactly?

88913527 3y ago

In some areas, properties get a tax reassessment after a sale. The LLC abstraction avoids the reassessment.

wahern 3y ago
California, at least, treats as a change in property ownership when a more than 50% interest in the legal owner (i.e. corporation, LLC, trust, etc) changes. The rules don't completely address the problem. For example, I think some buildings are owned by consortiums so that nobody has more than a 50% stake. But that limits their ability to easily make management decisions; there's a cost to that structure. You definitely still see buildings sold out-right, so it's not like every building in California is owned by an LLC just to avoid reassessment.
- hedora 3y ago
  The last time I checked, the 50% change in ownership had to be within one year in order to trigger the prop 13 revaluation (at least for commercial real estate). So, you transfer your corporate campus to an LLC, then sell 33% of it to a buyer this year, and agree to let them "run" the LLC, effective immediately. Next year, you sell another 33% of the LLC, and the year after, the last 33%. What I don't understand is why this isn't standard practice for residential properties owned by individuals. I assume you could use a combination of escrow accounts and collateralized loans to make the transaction mostly indistinguishable from wiring 100% of the money on the day of the sale. (I am not a lawyer or an accountant.)

HarryHirsch 3y ago

Prop 13 in California. Its purpose was to lower the tax burden on commercial real estate in perpetuity, and they did this by throwing in a bone for Grandma.

gopher_space 3y ago

Off the top of my head: value is tied to appraisal which happens during a sale. Land values wouldn't change to reflect local demand and this could depress tax revenue. You'd probably be able to get away with some foolishness regarding the building condition.

lotsofpulp 3y ago
This is only true for very few markets that have ridiculous subsidies for land owners via laws that limit property tax, such as California. Most other places re-assess all property values on an ongoing basis and charge you accordingly.
- mixdup 3y ago
  >Most other places re-assess all property values on an ongoing basis and charge you accordingly Those reassessments are based on market activity over the preceding year. Property changing hands without actually being a real estate transaction does not generate market data for the assessors to use

Centigonal 3y ago

Title transfer/recordation is taxed in lots of jurisdictions, this is a tax loophole that only people savvy enough to buy properties with LLCs can use. This is highly dependent on which state you're in though.

hammock 3y ago
> this is a tax loophole that only people savvy enough to buy properties with LLCs can use ? Tennis is a sport that only people savvy enough to buy tennis balls can play

eli_gottlieb 3y ago

It's a tax dodge.