How is Los Angeles property tax calculated if a 50% owner later buys out the other 50%?
"Can't vouch for LA, but property typically is taxed at either the appraised value, the most recent purchase price (""if it wasn't worth that much, you wouldn't have paid that much""), or some combination of the two (usually highest of the two, to prevent ""$1 and other goods and services"" from lowering the tax to zero). You have now explicitly paid a total of $125k for the property; the fact that you bought it in two stages shouldn't be relevant. But ""should"" and law are only tangentially connected. I'd recommend asking a tax accountant who know your local practices, unless someone here can give you an authoritative answer." When property changes hands the sale prices may or may not be used to determine the appraised value of the property, and they may or may not be used to determine the appraised value of other properties. Because of the nature of the transaction: you already have an existing business relationship, the local government is likely to ignore the data point provided by your transaction when determining values of similar properties. They have no idea if there was some other factor used to determine the price. They will also not include in the calculation transactions that are a result of foreclosure becasue the target price is the loan value not the true value.  California and some other jurisdictions do add another wrinkle. You will need to determine if the transaction will trigger a reevaluation of the property value. In some states the existing laws of the state limited the annual growth of the assessment, but that could now be recaptured if the jurisdiction rules that this is a new ownership: California Board of Equalization - Change in Ownership - Frequently Asked Questions How does a change in ownership affect property taxes? Each county assessor's office reviews all recorded deeds for that   county to determine which properties require reappraisal under the   law. The county assessors may also discover changes in ownership   through other means, such as taxpayer self-reporting, field   inspections, review of building permits and newspapers. Once the   county assessor has determined that a change in ownership has   occurred, Proposition 13 requires the county assessor to reassess the   property to its current fair market value as of the date ownership   changed. Since property taxes are based on the assessed value of a property at   the time of acquisition, a current market value that is higher than   the previously assessed Proposition 13 adjusted base year value will   increase the property taxes. Conversely, if the current market value   is lower than the previously assessed Proposition 13 adjusted base   year value, then the property taxes on that property will decrease. Only that portion of the property that changes ownership, however, is   subject to reappraisal. For example, if 50 percent of the property is   transferred, the assessor will reassess only 50 percent of the   property at its current fair market value as of the date of the   transfer, and deduct 50 percent from any existing Proposition 13 base   year value. In most cases, when a person buys a residence, the entire   property undergoes a change in ownership and 100 percent of the   property is reassessed to its current market value.
"Accounting for this properly is not a trivial matter, and you would be wise to pay a little extra to talk with a lawyer and/or CPA to ensure the precise wording. How best to structure such an arrangement will depend upon your particular jurisdiction, as this is not a federal matter - you need someone licensed to advise in your particular state at least. The law of real estate co-ownership (as defined on a deed) is not sufficient for the task you are asking of it - you need something more sophisticated. Family Partnership (we'll call it FP) is created (LLC, LLP, whatever). We'll say April + A-Husband gets 50%, and Sister gets 50% equity (how you should handle ownership with your husband is outside the scope of this answer, but you should probably talk it over with a lawyer and this will depend on your state!).  A loan is taken out to buy the property, in this case with all partners personally guaranteeing the loan equally, but the loan is really being taken out by FP. The mortgage should probably show 100% ownership by FP, not by any of you individually - you will only be guaranteeing the loan, and your ownership is purely through the partnership. You and your husband put $20,000 into the partnership. The FP now lists a $20,000 liability to you, and a $20,000 asset in cash. FP buys the $320,000 house (increase assets) with a $300,000 mortgage (liability) and $20,000 cash (decrease assets). Equity in the partnership is $0 right now. The ownership at present is clear. You own 50% of $0, and your sister owns 50% of $0. Where'd your money go?! Simple - it's a liability of the partnership, so you and your husband are together owed $20,000 by the partnership before any equity exists. Everything balances nicely at this point. Note that you should account for paying closing costs the same as you considered the down payment - that money should be paid back to you before any is doled out as investment profit! Now, how do you handle mortgage payments? This actually isn't as hard as it sounds, thanks to the nature of a partnership and proper business accounting. With a good foundation the rest of the building proceeds quite cleanly. On month 1 your sister pays $1400 into the partnership, while you pay $645 into the partnership. FP will record an increase in assets (cash) of $1800, an increase in liability to your sister of $1400, and an increase in liability to you of $645. FP will then record a decrease in cash assets of $1800 to pay the mortgage, with a matching increase in cost account for the mortgage. No net change in equity, but your individual contributions are still preserved. Let's say that now after only 1 month you decide to sell the property - someone makes an offer you just can't refuse of $350,000 dollars (we'll pretend all the closing costs disappeared in buying and selling, but it should be clear how to account for those as I mention earlier). Now what happens? FP gets an increase in cash assets of $350,000, decreases the house asset ($320,000 - original purchase price), and pays off the mortgage - for simplicity let's pretend it's still $300,000 somehow. Now there's $50,000 in cash left in the partnership - who's money is it? By accounting for the house this way, the answer is easily determined. First all investments are paid back - so you get back $20,000 for the down payment, $645 for your mortgage payments so far, and your sister gets back $1400 for her mortgage payment. There is now $27,995 left, and by being equal partners you get to split it - 13,977 to you and your husband and the same amount to your sister (I'm keeping the extra dollar for my advice to talk to a lawyer/CPA). What About Getting To Live There? The fact is that your sister is getting a little something extra out of the deal - she get's the live there! How do you account for that? Well, you might just be calling it a gift. The problem is you aren't in any way, shape, or form putting that in writing, assigning it a value, nothing.  Also, what do you do if you want to sell/cash out or at least get rid of the mortgage, as it will be showing up as a debt on your credit report and will effect your ability to secure financing of your own in the future if you decide to buy a house for your husband and yourself?  Now this is the kind of stuff where families get in trouble. You are mixing personal lives and business arrangements, and some things are not written down (like the right to occupy the property) and this can really get messy. Would evicting your sister to sell the house before you all go bankrupt on a bad deal make future family gatherings tense? I'm betting it might. There should be a carefully worded lease probably from the partnership to your sister. That would help protect you from extra court costs in trying to determine who has the rights to occupy the property, especially if it's also written up as part of the partnership agreement...but now you are building the potential for eviction proceedings against your sister right into an investment deal? Ugh, what a potential nightmare! And done right, there should probably be some dollar value assigned to the right to live there and use the property. Unless you just want to really gift that to your sister, but this can be a kind of invisible and poorly quantified gift - and those don't usually work very well psychologically. And it also means she's going to be getting an awfully larger benefit from this ""investment"" than you and your husband - do you think that might cause animosity over dozens and dozens of writing out the check to pay for the property while not realizing any direct benefit while you pay to keep up your own living circumstances too? In short, you need a legal structure that can properly account for the fact that you are starting out in-equal contributors to your scheme, and ongoing contributions will be different over time too. What if she falls on hard times and you make a few of the mortgage payments? What if she wants to redo the bathroom and insists on paying for the whole thing herself or with her own loan, etc? With a properly documented partnership - or equivalent such business entity - these questions are easily resolved. They can be equitably handled by a court in event of family squabble, divorce, death, bankruptcy, emergency liquidation, early sale, refinance - you name it. No percentage of simple co-ownership recorded on a deed can do any of this for you. No math can provide you the proper protection that a properly organized business entity can. I would thus strongly advise you, your husband, and your sister to spend the comparatively tiny amount of extra money to get advice from a real estate/investment lawyer/CPA to get you set up right. Keep all receipts and you can pay a book keeper or the accountant to do end of the year taxes, and answer questions that will come up like how to properly account for things like depreciation on taxes. Your intuition that you should make sure things are formally written up in times when everyone is on good terms is extremely wise, so please follow it up with in-person paid consultation from an expert. And no matter what, this deal as presently structured has a really large built-in potential for heartache as you have three partners AND one of the partners is also renting the property partially from themselves while putting no money down?  This has a great potential to be a train wreck, so please do look into what would happen if these went wrong into some more detail and write up in advance - in a legally binding way - what all parties rights and responsibilities are." To me this sounds like a transaction, where E already owns a company worth 400k and can therefore pocket the money from D and give D 25% of the profits every year. There is nothing objective (like a piece of paper) that states the company is worth 400K. It is all about perceived value. Some investors may think it is worth something because of some knowledge they may have. Heck, the company could be worth nothing but the investor could have some sentimental value associated to it. So is it actually the case that E's company is worth 400k only AFTER the transaction? It is worth what someone pays for it when they pay for it. I repeat- the 400K valuation is subjective. In return the investor is getting 25% ownership of the product or company. The idea is that when someone has ownership, they have a vested interest in it being successful. In that case, the investor will do whatever he/she can to improve the chances of success (in addition to supplying the 100K capital). For instance, the investor will leverage their network or perhaps put more money into it in the future. Is the 100k added to the balance sheet as cash? Perhaps. It is an asset that may later be used to fund inventory (for instance). ... and would the other 300k be listed as an IP asset? No. See what I said about the valuation just being perception. Note that the above analysis doesn't apply to all Dragons Den deals. It only applies to situations where capital is exchanged for ownership in the form of equity. First of all, I've been out of college for over a decade, so good job on the assumptions. /s  Secondly, when calculating capital gains, you have to take into account the depreciation of the asset. As you would have it, a house owned for 20 years would be fully depreciated, and so no capital gains would apply to such a case.   But don't let facts or knowledge get in the way of your trolling, please. There's an odd anomaly that often occurs with shares acquired through company plans via ESPP or option purchase. The general situation is that the share value above strike price or grant price may become ordinary income, but a sale below the price at day the shares are valued is a capital loss.  e.g. in an ESPP offering, I have a $10 purchase price, but at the end of the offering, the shares are valued at $100. Unless I hold the shares for an additional year, the sale price contains ordinary W2 income. So, if I see the shares falling and sell for $50, I have a tax bill for $90 of W2 income, but a $50 capital loss. Tax is due on $90 (and for 1K shares, $90,000 which can be a $30K hit) but that $50K loss can only be applied to cap gains, or $3K/yr of income.  In the dotcom bubble, there were many people who had million dollar tax bills and the value of the money netted from the sale couldn't even cover the taxes. And $1M in losses would take 300 years at $3K/yr.  The above is one reason the lockup date expiration is why shares get sold. And one can probably profit on the bigger companies stock.  Edit - see Yelp down 3% following expiration of 180 day IPO lock-up period, for similar situation. "In Orange County (southern California), one agent has blogged pretty extensively about using rental parity to determine when it is time to rent or buy. Rental parity is achieved when the cost of renting is equal to the cost of owning; in theory, if you buy when a home is selling above rental parity, you're overpaying, and you'd be better off renting. He has many posts on the subject; a few you might care to read would be this one, and this other one. You might get a better sense of how to calculate rental parity by looking at an example or two. There is also the NY Times calculator mentioned in other responses, and the Patrick.net calculator. Be aware, the calculators are garbage in, garbage out. In other words, you have to consider the input carefully. In particular, I found the defaults on the Patrick.net calculator were not realistic. So far as I am aware, the agent at OCHousingNews does not make his calculations public (though I have never actually asked). He's using a spreadsheet which I have never seen. That is another option, if you care to do this kind of analysis yourself. Search around, you can find a spreadsheet that someone has posted here and there. But keeping something like that updated is not trivial. In my experience, in practice, it's difficult to be totally rational and mathematical when it comes to many decisions, and as other respondents have noted, where you live is one of those decisions. Too, saying ""buy when rental parity is achieved"" is sort of like saying ""buy low, sell high,"" as though it were perfectly clear when stocks are at a bottom and/or a peak. In our case, we bought a house about 12 years ago, before rental parity was being discussed in the blogsphere. Looking back, we supposedly bought at the wrong time, according to that agent's rating system, but it turned out fine for us. Our house has appreciated, whereas the S&P 500 is basically where it was 12 years ago. Had we been thinking in terms of rental parity, we might not have bought at that time. Of course, your mileage may vary, and hindsight is always 20/20. I think the most helpful advice I can offer was something I got from a real estate agent around the time we were looking. He told me ""when you're looking at houses, be sure you like the floor plan and the location, because those two things are not easily changed."" That advice really helped us to see things more clearly." I believe you can easily make tresholds for what constitute a partial owner. If I work for GE and buy a share, I'm not exactly a partial owner.  Anything under 10% for companies making, I don't know, less than 50 Mil in revenue, you're an employee. Larger companies, 5%.  That's just an idea, could be refined but, yeah... No. You're entitled to 1% of votes at the shareholders' meeting (unless there's class division between shareholders, that is). If more than 50% of the shareholders vote to close the company, sell off its assets and distribute the proceeds to the owners - you'll get 1% share of the distributions. "BigCo is selling new shares and receives the money from Venturo. If Venturo is offering $250k for 25% of the company, then the valuation that they are agreeing on is a value of $1m for the company after the new investment is made.  If Jack is the sole owner of one million shares before the new investment, then BigCo sells 333,333 shares to Venturo for $250k.  The new total number of shares of BigCo is 1,333,333; Venturo holds 25%, and Jack holds 75%. The amount that Jack originally invested in the company is irrelevant.  At the moment of the sale, the Venturo and Jack agree that Jack's stake is worth $750k.  The value of Jack's stake may have gone up, but he owes no capital gains tax, because he hasn't realized any of his gains yet.  Jack hasn't sold any of his stake.  You might think that he has, because he used to hold 100% and now he holds 75%.  However, the difference is that the company is worth more than was before the sale.  So the value of his stake was unchanged immediately before and after the sale. Jack agrees to this because the company needs this additional capital in order to meet its potential. (See ""Why is stock dilution legal?"") For further explanation and another example of this, see the question ""If a startup receives investment money, does the startup founder/owner actually gain anything?"" Your other scenario, where Venturo purchases existing shares directly from Jack, is not practical in this situation.  If Jack sells his existing shares, you are correct that the company does not gain any additional capital.  An investor would not want to invest in the company this way, because the company is struggling and needs new capital." This question is really a variation of rent vs buy.  Try looking at it this way - If you bought it 50/50 and rented it out, what would you both get? Now, moved in, you are effectively collecting that rent, but half is your own money, half is from the partner.  Is the half you are getting the from the partner equal to 1/4 of the mortgage. This sounds convoluted, but once you spell all the numbers out, it would be clear.  Without the deal as you present it, you'd be paying the partner to 'live in his half.' "Not sure what you are talking about.  The house isn't part of a business so neither of you can deduct half of normal maintenance and repairs.  It is just the cost of having a house.   The only time this would be untrue is if the thing that you are buying for the house is part of a special deduction or rebate for that tax year.  For instance the US has been running rebates and deductions on certain household items that reduce energy - namely insulation, windows, doors, and heating/cooling systems (much more but those are the normal things). And in actuality if your brother is using the entire house as a living quarters you should be charging him some sort of rent.  The rent could be up to the current monthly market price of the home minus 50%.  If it were my family I would probably charge them what I would pay for a 3% loan on the house minus 50%.   Going back to the repairs... Really if these repairs are upgrades and not things caused by using the house and ""breaking"" or ""wearing"" things you should be paying half of this, as anything that contributes to the increased property value should be paid for equally if you both are expecting to take home 50% a piece once you sell it." You need to be clear about who gets your money: If you pay the existing owner $25K and (s)he gives you half the business, then you now own half of a $50K business an the original owner has an extra $25K in spending cash.  The value of the business has not changed. If you contribute $25 to the company, new equity shares are created.  Shares should be priced correctly, meaning you now own $25K worth of shares in a company worth $75k, so you should have 1/3 of the outstanding shares (counting both old and new shares).  If you get more or less than this, then the transaction has happened in an unfair way. If this is a public company, that would most likely be illegal and the SEC may throw you in jail.  If it was a private company and your friend created enough shares that you own half the company, then (s)he has given you a gift. If you are contributing to the company at a fair price, you would need to contribute $50K in order to end up with half the equity of the new and now more valuable firm. In that case the firm would be worth $100K after your contribution. Bottom line, this is a common and not complex transaction and should end up with a completely fair outcome.  Any unfair situation you can imagine is probably based on false assumptions or a situation where a non-arms-length transaction is transferring wealth contrary to normal rules and procedures. Interesting.  How would they account for it? Monthly? And if so do they modify the cost basis for each lot for the month and then restate?   It's hard to imagine they do that.   I have a million questions regarding this topic do you know where in the regs it is covered? Your question has already been answered, you divide the amount of shares you own * 100% by the total amount of shares. However, I feel it is somewhat misleading to talk about owning a percentage of the company by owning shares. Strictly speaking, shares do not entitle you to a part of the company but instead give you a proportional amount of votes at shareholder meetings (assuming no funky share classes). What this means is that someone who owns 30% of a company's shares can't just grab 30% of the company's assets (factories, offices and whatever) and say that they are entitled to own this. What they actually own is 30% of the voting rights in this company, this means that they control 30% of all available votes when the company calls a vote on corporate actions, choosing a new director etc. which is how shareholders exert their influence on a company. To start, I hope you are aware that the properties' basis gets stepped up to market value on inheritance.  The new basis is the start for the depreciation that must be applied each year after being placed in service as rental units. This is not optional. Upon selling the units, depreciation is recaptured whether it's taken each year or not. There is no rule of thumb for such matters. Some owners would simply collect the rent, keep a reserve for expenses or empty units, and pocket the difference. Others would refinance to take cash out and leverage to buy more property. The banker is not your friend, by the way. He is a salesman looking to get his cut. The market has had a good recent run, doubling from its lows. Right now, I'm not rushing to prepay my 3.5% mortgage sooner than it's due, nor am I looking to pull out $500K to throw into the market.  Your proposal may very well work if the market sees a return higher than the mortgage rate. On the flip side I'm compelled to ask - if the market drops 40% right after you buy in, will you lose sleep?  And a fellow poster (@littleadv) is whispering to me - ask a pro if the tax on a rental mortgage is still deductible when used for other purposes, e.g. a stock purchase unrelated to the properties.   Last, there are those who suggest that if you want to keep investing in real estate, leverage is fine as long as the numbers work. From the scenario you described, you plan to leverage into an already pretty high (in terms of PE10) and simply magnifying your risk. From my memory of CFA Level 2 accounting:  * If Company A buys 50% or more of company B, they must consolidate 100% of Company B on their financial statements. The % of the business they don't own is multiplied by net income every year, and the resulting number is added to minority interest on the balance sheet. * If Company A buys more than 20% but less than 50%, use the equity method of accounting. This involves creating an asset for the purchase price paid for the stake in Company B. The asset increases in value by dividends received, that's it. * If Company A buys 20% or less, the investment is held in Marketable securities or something similar on the balance, and is marked-to-market.