The 21-unit apartment complex at 926 N. Ardmore Ave. looks as unassuming as its low-slung east Hollywood neighbors. But the beige midcentury modern building is at the center of a legal battle that could fundamentally alter how properties change hands in California.

In a case now before the state Supreme Court, the complex’s co-owners are fighting Los Angeles County over the assessment of a “transfer tax” on a deal the co-owners maintain is exempt because the property itself never changed hands. Instead, the ownership stakes were transferred through a chain of holding companies and trusts.

Typically, the county struggles to assess taxes on similar transactions – and collect its 0.0011 percent tax on the transfer of real estate paid by homeowners and investors alike when they sell their properties. (The city has its own 0.0045 percent transfer tax.) Transfer taxes are not the only potential losses for cities and counties: Each transaction can also trigger a reassessment for property tax purposes.

Because transfer deals similar to Ardmore can avoid being recorded, there is no way to tell how much tax revenue is lost. One USC study suggests it could be billions of dollars in property taxes a year.

Government agencies came to rely more heavily on transfer taxes after the 1978 approval of Proposition 13, which limits property tax rate increases. The city of Los Angeles last year collected $204 million in transfer taxes.

The Ardmore case is a bellwether test to determine if decades of transfer tax precedent hold up. If not, real estate investors might want to set aside extra cash for the tax man.

“A lot of taxpayers are going to get blindsided here,” said Peter Michaels, an attorney in Oakland who represents the Alliance of Taxpayer Advocates. “Most won’t have the slightest idea that they have exposure to this tax.”

The Hollywood apartment owners, who controlled the property through an entity known as 926 N. Ardmore Avenue LLC, hope that won’t be the case. Their attorney, Lemoine Skinner, said he expects the high court to reverse the lower courts, which he claims overstepped their jurisdiction in 2014 when they ruled that legislative intent allowed for a broad interpretation of “change of ownership.”

“What happened at the trial court and court of appeal was judicial legislation,” said Skinner, an attorney at Westwood’s Goodson Wachtel & Petrulis.

The importance of the case to both sides is clear. More than a dozen counties in the state have joined Los Angeles in asking the lower court rulings be upheld. On the property owner side, nearly every major taxpayer advocacy group and several trade associations have lined up to ask, at the very least, for a clarification of transfer tax rules.

For reprint and licensing requests for this article, CLICK HERE.