Can My Child Inherit My Home Through an LLC Without Property Tax Reassessment?

California Proposition 19 can provide valuable property-tax protection when a child inherits a parent's principal residence and continues to use the property as the child's principal residence. However, a potential problem arises when the residence is owned by a limited liability company rather than by the parent individually or through a revocable living trust.

Proposition 19 Generally Does Not Apply to LLC Interests
Proposition 19 applies to qualifying transfers of a family home between a parent and child. An ownership interest in an LLC, however, is generally treated as an interest in a legal entity rather than a direct interest in the real property.
Accordingly, if a parent owns 100% of an LLC that owns the parent's residence, and the child inherits the parent's 100% membership interest in that LLC, the child generally cannot claim the Proposition 19 parent-child exclusion merely because the home was the parent's principal residence and becomes the child's principal residence.
The California State Board of Equalization specifically cautions that whether property owned by an LLC is reassessed depends instead on the separate change-in-ownership rules applicable to legal entities.

In other words, once the transfer is characterized as a transfer of an LLC interest rather than a direct transfer of real property, the analysis moves outside the Proposition 19 parent-child exclusion and into California's separate statutory change-in-ownership rules for legal entities. Those rules are found primarily in Revenue and Taxation Code sections 62 and 64.

The LLC May Still Trigger Reassessment
Under California Revenue and Taxation Code section 64, when a person acquires more than 50% of the ownership interest in an LLC, a change in control generally occurs. The California real property owned by the LLC may then be reassessed to current fair market value.
For example, if a father owns 100% of an LLC that owns his home and, at his death, his son inherits 100% of the LLC, the son has acquired control of the LLC. Even though the LLC remains on title to the property and no deed transferring the house is recorded, the transfer of the LLC interest can result in reassessment of the underlying residence.

Why the Form of Ownership Matters
The result may be very different if the parent owns the residence directly or through a properly structured revocable trust. A direct transfer of a qualifying family home from parent to child may be eligible for the Proposition 19 exclusion if the applicable requirements are satisfied, including the principal-residence requirements and applicable value limitations.

For this reason, individuals who hold a principal residence inside an LLC should review the property's ownership structure as part of their estate planning. An LLC may provide useful liability or management benefits, but it should not be assumed that placing a residence in an LLC will preserve the property's existing property-tax assessment for the next generation. In some circumstances, it can produce the opposite result.
Because legal-entity ownership rules are technical and highly fact-specific, the ownership structure should be reviewed before making transfers or implementing an estate plan.