Owning real estate in California can create significant financial opportunity — and significant tax complexity. Whether the property is a residence, rental, inherited asset, or co-owned investment, multiple layers of taxes may apply at different stages of co-ownership.
For co-owners in particular, taxes often become critically important when a dispute arises, a buyout is negotiated, or a partition action forces a sale. Below is a comprehensive overview of the major categories of taxes that California real estate owners should understand from our partition attorneys in California.
1. Property Taxes (Ad Valorem Taxes)
Failure to pay property taxes on co-owned property is a common source of conflict.
Proposition 13 Property Taxes
California property taxes are governed primarily by Proposition 13. The base property tax rate is:
- 1% of assessed value, plus
- Additional voter-approved local bond indebtedness
When property is purchased, it is typically assessed at its purchase price. Annual increases in assessed value are generally capped at 2% per year, regardless of how much the property appreciates.
However, reassessment to full fair market value occurs upon:
- A change in ownership
- New construction
For long-held properties, reassessment can dramatically increase annual property taxes.
Supplemental Property Taxes
When property is reassessed mid-year (such as after a sale), the county issues a supplemental tax bill covering the difference between the old and new assessed values for the remainder of the tax year.
Owners often receive these bills months after closing.
Reassessment Triggers
Reassessment does not only occur with a traditional sale. It can also be triggered by:
- Transfers between co-owners
- Transfers into or out of certain trusts
- Transfers of more than 50% of ownership interests in an LLC or corporation
- Certain inherited property transfers (Proposition 19 significantly narrowed parent-child exclusions)
Failure to analyze reassessment consequences before a transfer can lead to unexpectedly higher property taxes.
2. Special Assessments and Parcel Charges
In addition to base property taxes, owners may pay special assessments that appear on the property tax bill.
Mello-Roos Taxes
Common in newer developments, Mello-Roos taxes fund infrastructure such as:
- Roads
- Schools
- Utilities
These assessments may last decades and can substantially increase annual carrying costs.
Local Benefit Assessments
These may include charges for:
- Landscaping districts
- Lighting districts
- Flood control
- Vector control
Unlike ad valorem taxes, these are typically fixed or formula-based.
Parcel Taxes
Some cities and school districts impose flat parcel taxes that are not based on property value.
3. Transfer Taxes
Transfer taxes are imposed when property is conveyed.
California Documentary Transfer Tax
The state transfer tax is: $1.10 per $1,000 of consideration
This tax is typically paid at recording.
Local Transfer Taxes
Many cities and counties impose additional transfer taxes. In some jurisdictions (such as Los Angeles or San Francisco), local transfer taxes can significantly exceed the state rate.
“Mansion” or High-Value Taxes
Certain cities impose additional taxes on high-value sales. For example, Los Angeles’ Measure ULA imposes a percentage-based tax on transactions above specified thresholds.
For co-owners resolving disputes through buyouts or partition sales, transfer tax allocation should be addressed clearly in settlement agreements.
4. Income Taxes on Rental Property
Owners of rental property and other commercial properties are subject to both federal and California income taxes on net rental income.
Federal Income Tax
Rental income is taxed at ordinary income rates after deductions, which may include:
- Mortgage interest
- Property taxes
- Insurance
- Repairs and maintenance
- Property management fees
- Depreciation
Passive activity rules may limit the deductibility of losses.
California Income Tax
California generally conforms to federal treatment but does not provide preferential capital gains rates.
5. Depreciation and Recapture
Rental and commercial property owners may depreciate improvements over time:
- Residential rental property: 27.5 years
- Commercial property: 39 years
While depreciation reduces taxable income during ownership, it creates potential exposure later.
Depreciation Recapture
When the property is sold, previously taken depreciation may be taxed at up to 25% federally. Many owners underestimate this liability when analyzing a potential sale.
6. Capital Gains Taxes Upon Sale
When real property is sold at a gain, capital gains taxes may apply.
Federal Capital Gains Tax
If the property was held for more than one year, long-term capital gains rates apply.
California Capital Gains Tax
California does not offer a separate capital gains rate. Gains are taxed as ordinary income at state rates.
Principal Residence Exclusion
For primary residences, federal law allows exclusion of:
- Up to $250,000 for each owner or co-owner
- Up to $500,000 (married filing jointly)
This exclusion requires meeting ownership and use requirements.
In partition cases involving inherited or former residences, eligibility for this exclusion should be evaluated carefully.
7. Withholding at Time of Sale
Certain withholding rules apply at closing, including co-owned properties sold by a partition referee.
California Withholding (Form 593)
Generally, 3.33% of the gross sale price is withheld. Exemptions or alternative gain-based calculations may apply.
FIRPTA (Foreign Investment in Real Property Tax Act)
If the seller is a foreign person, federal withholding of up to 15% of the gross sales price may apply.
8. Estate and Gift Tax Considerations
Step-Up in Basis
Upon death, heirs typically receive a stepped-up basis to fair market value. This can eliminate built-in capital gains exposure when inheriting property in California.
Federal Estate Tax
Applies only to estates exceeding the federal exemption amount.
Federal Gift Tax
Lifetime transfers of real property may require gift tax reporting, even if no tax is ultimately due.
California does not currently impose a state estate tax.
9. Entity-Level Taxes
When property is owned in an entity:
LLC Tax
- $800 minimum annual California franchise tax
- Additional gross receipts fee at higher revenue levels
Corporate Tax
C-corporations face corporate income tax and potential double taxation on distributions.
Entity structuring decisions can significantly affect tax outcomes, particularly in co-ownership situations.
10. Short-Term Rental Taxes
Transient Occupancy Tax (TOT)
Local hotel-type taxes, often ranging from 8% to 15% or more.
Local Registration and Compliance Requirements
Failure to comply can result in penalties, fines, and enforcement actions.
11. Construction and Development Fees
Owners improving or developing property may encounter:
- Use tax on out-of-state materials
- Development impact fees
- School fees based on square footage
These are often significant in new construction projects.
Why This Matters in Co-Ownership and Partition Cases
Tax consequences frequently become central when:
- One co-owner buys out another
- Property is sold through a partition action
- Title is transferred between family members
- Entity ownership interests change
Reassessment, transfer tax allocation, capital gains exposure, depreciation recapture, and withholding rules can materially affect the net recovery each co-owner receives.
Before agreeing to a buyout or forcing a sale, California co-owners should understand not only the value of the property, but the tax consequences attached to that value.
For co-owners facing disputes, tax implications are often as important as the legal strategy itself.
Talkov Law Partition Attorneys Can Help
Ending a co-ownership dispute requires knowledge of various laws in California, including the numerous forms of taxation. Whether your dispute arises from an inherited property partition, multi-property partition, or otherwise, the attorneys at Talkov Law Partition Attorneys can help. For a free consultation about your partition action, call us at (877) PARTITION (727-8484) or contact us online.
