This past November, San Francisco voters approved Proposition W, a ballot measure that increased real property transfer tax rates and made certain other changes to the language of the San Francisco transfer tax ordinance. One of the changes provides that any time there is a transfer of interests in a legal entity that results in a deemed “change of ownership” of the real property that the legal entity owns, the real property will be treated as if it were sold for its full fair market value. Consequently, transfer tax will be applied to the full fair market value of the property, regardless of any amount paid for the interests in the legal entity.
The problem with this change for persons who wish to make gifts of interests in legal entities is that such gifts can result in a “change of ownership” of the real property that the entity owns. By causing every “change of ownership” to give rise to a deemed sale of the real property, it appears that gifts of interests in legal entities that result in a “change of ownership” will now trigger transfer tax on the full fair market value of the real property that the legal entity holds. Notably, this could be the result even if the gift were made to a charitable organization.
This is a departure from the previous rule. The California Revenue and Taxation Code provides an exception from transfer tax for gifts.
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