California limited liability company disputes | Courtroom war stories and lessons learned

Will Using an LLC Mess Up a Property Tax Base Transfer Under California Law?

Under California’s Proposition 60, which became enacted in 1986 as Revenue and Taxation Code section 69.5, any “person” over the age of 55 years may transfer the base year value of his or her residential property to any replacement dwelling of equal or lesser value that is located within the same county and is “purchased or newly constructed by that person as his or her principal residence” within two years of the sale.

Under the statute, a “person” eligible for transfer of the property tax base under section 69.5 does not include a business entity.  Further, at the time of making a claim for property tax relief, the replacement dwelling must be owned by the “person” — not a business entity.

What if a cautious, risk-averse “person” decides to temporarily use a limited liability company (LLC) to purchase the replacement lot and construct the replacement dwelling?  A recent opinion from California’s First Appellate District — Wright v. County of San Mateo — addresses the issue.

Facts: couple temporarily uses LLC to buy and construct new home

In 2010, the plaintiffs Richard Wright and Susan Hansch arranged for the purchase of an unimproved lot in the City of Half Moon Bay in San Mateo County.  Plaintiffs intended to install a manufactured home on the lot and use that home as their primary residence.

During escrow, the lender informed plaintiffs that it would not issue a construction loan for the manufactured home unless title to the lot was held by an LLC.  So, plaintiffs formed an LLC and took title to the lot in the name of the LLC and also took out a construction loan in the name of the LLC.  Plaintiffs also personally entered into a contract for the purchase of a manufactured home.

After installation of the new home was completed, plaintiffs transferred the property from the LLC to themselves.  Plaintiffs then applied with the county to transfer their property tax base from their prior residence under Revenue and Taxation Code section 69.5.

County Assessment Appeals Board and Trial Court’s Rulings: LLC is not a “person,” so no transfer of tax base

The county denied Plaintiffs’ request to transfer their property tax base, and that decision was upheld by the county tax assessment appeals board.

The board held that plaintiffs would have been entitled to the property tax base transfer “if they had performed all transactions themselves instead of through the LLC.”  But since the LLC took title to the property, obtained the loan, and obtained the building permit, plaintiffs were not entitled to the tax base transfer benefits.

The board acknowledged that plaintiffs personally contributed much of the financial resources for the project, but concluded that those payments “might be best understood as contributions to the LLC by its members.”

Plaintiffs sued, but the trial court sided with the county assessment appeals board and granted summary judgment in favor of the county.  Plaintiffs appealed.

Court of Appeal’s Opinion: the temporary use of an LLC does not thwart tax benefits

The Court of Appeal reversed, ruling in favor of the plaintiffs.

The court held that under the facts of the case, the replacement dwelling was constructed by plaintiffs, not their LLC.

The court noted that plaintiffs formed the LLC to enable them to obtain the construction loan for the manufactured home, and at all times plaintiffs intended to (and did) transfer ownership of the lot to themselves once construction was complete.  Also, while the LLC obtained the construction loan, plaintiffs contributed substantial personal funds for both the purchase of the lot and the purchase and installation of the manufactured home.  Plaintiffs also personally signed the contract for the construction of the home.

Since plaintiffs personally constructed the new residence, and owned title to the property at the time they applied to transfer the property tax base, they were entitled to relief.  Speaking of the plaintiffs, the court concluded:

They are precisely the persons for whom the statute was intended to provide property tax relief.  The fact that, to satisfy a bank requirement, they made temporary use of an LLC before taking title to their replacement property provides no justification under the terms of the statute or in logic or fairness for denying them the relief provided by section 69.5.  We emphasize that our conclusion would be different if title to the property had remained in the name of the LLC when the claim under section 69.5 was submitted.


Under California’s Revenue and Taxation Code section 69.5, if a “person” purchases or newly constructs a replacement dwelling that otherwise meets the requirements of the statute, the property tax base can be transferred to the new property.

The temporary use of an LLC to satisfy bank lending requirements relating to the construction of the new residence does not necessarily defeat the right to a property tax base transfer.

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