Watch out for California transfer taxes in transactions involving real estate holdings

State and Local Tax Alert

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When compared to the real estate transfer tax systems of other states,1the California Documentary Transfer Tax Act2 imposes a relatively low tax at the rate of $1.10 per $1,000 of value (exclusive of liens existing at the time of transfer). 

In recent years, however, a number of California counties and cities have, through local ordinances, started to impose transfer taxes at higher rates or have expanded the circumstances under which the real estate transfer tax is imposed. 

Companies with real estate holdings in California should take note of this trend.  Given the budget constraints faced by California’s counties and cities, the scope of transfer taxes in that state will likely expand.   

This article provides an overview of the California real estate transfer tax system and then identifies some of the jurisdictions that have expanded the scope of the tax.

California’s documentary transfer tax system

The tax is imposed “on each deed, instrument, or writing by which any lands, tenements, or other realty sold within the county shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction.”3  The tax also applies to property held by a partnership which undergoes an Internal Revenue Code (IRC) Section 708 termination of the partnership4(defined as a transfer of 50% or more of the capital and profits of the partnership within a 12-month period).  Note that upon an IRC Section 708 termination, 100 percent of the net value of the partnership property is subject to transfer tax, even if less than 100 percent of the partnership is transferred.

There are a number of transfers to which the documentary transfer tax does not apply, including recordation of an instrument to secure a debt,5 conveyances in a bankruptcy reorganization,6 foreclosures (to the extent the consideration does not exceed the unpaid debt),7 transfers pursuant to a marital dissolution8 and gifts and bequests.9  In addition, the documentary transfer tax is not imposed with respect to any proportional interest transfer “between an individual or individuals and a legal entity or between legal entities that results solely in a change in the method of holding title to the realty and in which proportional ownership interests in the realty, whether represented by stock, membership interest, partnership interest, cotenancy interest, or otherwise, directly or indirectly, remain the same immediately after the transfer.”10

The Act does not contain a provision which applies the tax to transfers of stock in corporations which hold real property.  Further, while not free from doubt, the traditional view of many practitioners in California has been that the transfer of all of the membership interests in a single-member limited liability company is not subject to the documentary transfer tax.  As discussed below, certain counties and cities are now challenging this view.

With that background, we can now examine some jurisdictions which have a documentary transfer tax system that expands on the tax imposed under the Act.

Jurisdictions with increased or more expansive documentary transfer tax systems

These are some of the California jurisdictions that have imposed transfer tax in addition to the tax imposed under the Act.   

San Francisco.  San Francisco, by a voter-approved ordinance,11 has adopted the legal entity “change in control” concept from California property tax law12 for the purpose of determining whether San Francisco transfer tax is due.  Thus, if a legal entity which owns real estate in San Francisco undergoes a change in control for property tax purposes,13 a transfer tax will be due as well.  This means that the acquisition of more than half of the interests in a single-member limited liability company or a corporation is subject to the documentary transfer tax in San Francisco.  The highest marginal transfer tax rate in San Francisco (for real estate with a value over $10 million) is 2.5 percent of the full value, unreduced by encumbrances.14

County of Los Angeles.  The County of Los Angeles has not adopted a change-in-control ordinance like San Francisco, but it has adopted a very broad reading of the documentary transfer tax statute.  On its website, the County of Los Angeles states, “The Los Angeles County Registrar-Recorder/County Clerk (‘RRCC’) began enforcing collection of Documentary Transfer Tax (’DTT’) on legal entity transfers where no document is recorded, but which resulted [sic] a greater than 50% interest in control of the legal entity being transferred. The collection is made pursuant to Chapter 4.60 of the Los Angeles County Code, and California Revenue and Taxation Code (’RTC’) sections 11911 and 11925, and is consistent with case law which defines ‘realty sold’ as having the same meaning as changes in ownership for property tax purposes in RTC section 64(c)(1).  In addition, effective January 1, 2010, RTC section 408 was amended to allow recorders to obtain information pertaining to these transfers from the Assessor. As a result, in an effort to collect the tax, the RRCC will continue to identify, and send notices for, properties where a change of ownership occurred which transferred a greater than 50% controlling interest in the legal entity thereby creating a liability for the DTT.”15

Furthermore, a number of cities in the County of Los Angeles impose a documentary transfer tax, in addition to the $1.10 per $1,000 of value county transfer tax.16  Culver City and the City of Los Angeles (which includes a number of unincorporated areas) impose an additional tax of $4.50 per $1,000 of net value, Santa Monica imposes an additional tax of $3.00 per $1,000 of net value, and Pomona and Redondo Beach impose an additional tax of $2.20 per $1,000 of net value.

Santa Clara County.  Santa Clara County has a transfer tax ordinance similar to the San Francisco change-in-control ordinance.17  Anecdotal evidence, however, indicates that enforcement of this ordinance may be lax.  In addition, the cities of Mountain View, Palo Alto and San Jose impose additional documentary transfer tax of $3.30 per $1,000 of full value, unreduced by encumbrances.18

Other jurisdictions.  Other counties which have cities that impose additional documentary transfer taxes include Alameda, Contra Costa, Marin, Riverside, Sacramento, San Mateo, Solano, Sonoma and Yolo.19

Understand in advance how much transfer tax may be due. When planning a transaction involving real estate, or the transfer of interests in legal entities holding real estate, a practitioner should review the transfer tax rules and rates in the jurisdiction where the real estate is located so that the parties know, in advance, how much transfer tax will be due. 

Taxpayers should be alert for variations between the county and city ordinances applicable to the subject property. 

Given that many cities see the transfer tax as a potential revenue source, it is important to re-check ordinances and websites just prior to closing to ensure that a new rule or interpretation has not been adopted.  Depending on the amount of tax, it may be worthwhile to consult with experienced tax counsel to determine if the transaction can be structured in a way to reduce or eliminate the transfer tax. 


1 For example, in New York City the transfer tax rate is between 1 percent and 2.625 percent of value in addition to the New York State transfer tax.  The District of Columbia transfer tax rate is 1.1 percent of value.

2 California Revenue and Taxation (R&T) Code Section 11901, et. seq.

3 R&T Code Section 11911(a).

4 R&T Code Section 11925(b).

5 R&T Code Section 11921.

6 R&T Code Section 11923.

7 R&T Code Section 11926.

8 R&T Code Section 11927.

9 R&T Code Section 11929.

10 R&T Code Section 11925(d).

11 City and County of San Francisco Business and Tax Regulations Code Article 12-C, Section 1114.

12 R&T Code Section 64.

13 There is a change in control of a legal entity if A person or entity obtains direct control of an entity when the person or entity either (1) acquires more than 50 percent of the voting stock of a corporation; or (2) acquires a majority (more than 50 percent) ownership interest in any partnership or LLC capital and profits; or (3) acquires more than 50 percent of the total ownership interest in any other entity (unless the proportional interest transfer exception applies).  R&T Code Section 64(c).  Further, a transfer of ownership interest in a legal entity that results in a cumulative transfer of more than 50 percent of original co-owner interests (resulting from a previous proportional interest transfer) in that entity is a change in ownership of the real property owned by the entity.  R&T Code Section 64(d).

14 http://www.sfassessor.org/index.aspx?page=77#TTAX

15 http://www.lavote.net/recorder/document_recording.cfm

16 Id.

17 County of Santa Clara Code Section A30-39.6.

18 http://www.sccgov.org/portal/site/rec.

19 http://www.chicagotitletransfertax.com/.