As election season heats up, it may seem like there is no end to the deluge of political advertisements on the airwaves. Most of the attention, it seems, is on the presidential race. However, closer to home there are two propositions on November’s ballot that, if passed, will have a profound effect on California’s property tax system.
Proposition 15 – Split Roll
One of the initiatives voters will be asked to decide is Prop 15 which would amend the California Constitution to require commercial and industrial properties to be taxed based on their market value as opposed to their original purchase price. Under the existing property tax system, real property is taxed based on the value at the time when it was purchased, plus an inflation adjustment not to exceed 2% per year. Prop 15 would create a “split roll” where property taxes on residential properties would continue to be based on the purchase price, but large commercial and industrial properties would be taxed at market value. Owners of commercial properties with a combined value of less than $3 million, and properties zoned as commercial agriculture are exempt.
According to proponents, Prop 15 will generate between $8 billion and $12.5 billion in additional revenue per year. Prop 15 would create a process to distribute the revenue to specific areas such as cities, counties, special districts, schools, and community colleges.
Opponents argue that the increase in property taxes will be passed on to small businesses that lease, rather than own, property. Under standard “triple net” lease agreements, tenants pay the property taxes, which could either force a business to close or pass on the cost to consumers. Furthermore, opponents claim that a massive tax increase in the middle of an unprecedented recession caused by the pandemic would stunt economic recovery.
Proposition 19 – Elimination of Parent-Child Exclusion From Property Tax Reassessment
Prop 19 is a combination of two separate property tax measures, one designed to lessen the tax burden for a certain group of people and to increase it for another group. Prop 19 is similar to Prop 5 that was voted down in 2018, which would allow homeowners 55 years and older, or who meet other qualifications, to transfer the property tax base of their current home to a new home regardless of whether the new home is more or less expensive. Existing rules allow homeowners who are over age 55 to transfer their property tax base to a less expensive home within the same county or in another county that has authorized such a transfer by ordinance. The rationale behind these exemptions was to allow older homeowners to downsize without incurring a property tax increase. Prop 19 would allow a move anywhere within California, and eligible homeowners would receive a reduced tax value not only when purchasing a cheaper home, but also when purchasing a more expensive home. Currently, eligible homeowners can only transfer the tax value of a home one time, but Prop 19 would allow up to three transfers.
Prop 19 also eliminates the Prop 58 parent-to-child (and Prop 193 grandparent-to-grandchild) exclusion from property tax reassessment if the transferred property is not used as a principal residence. Currently in California, parents can transfer a primary residence to their children without triggering a property tax reassessment. Properties other than a primary residence, such as a vacation home or a business property, can also be transferred from parent to child with the first $1 million of assessed value being exempt from reassessment. Prop 19 would limit the parent-child property tax exemption to properties used as a primary residence by the child, and properties used for farming. A child must use the parent’s home as their primary residence in order to qualify for the exclusion from reassessment, and only the first $1 million of assessed value is excluded. Prop 19 would eliminate the reassessment exclusion for a parent-to-child transfer of property that is not used as the child’s primary residence or for farming.
Proponents claim that Prop 19 will free up housing by making it more affordable for older homeowners to move. Moreover, eliminating the property tax exemption for inherited properties would provide additional tax revenue to local governments, and potentially offset the loss in property taxes caused by Prop 19’s expanded exemption rules for homeowners over 55. A portion of the increased revenue would go towards fire protection.
Opponents argue that existing law already allows homeowners age 55 years and older to move to a replacement home of equal or lesser value within the same county or to a county that accepts the transfers. Opponents also question why a tax break should be available for the purchase of a more expensive home if one of the premises behind the program is to assist older homeowners in downsizing. Furthermore, a similar initiative, Prop 5, was defeated by the voters in 2018. The elimination of the parent-to-child exemption would constitute an increased tax burden that could force children who inherit family property to sell or pass on the higher taxes to the tenant in the form of increased rent.
Both propositions are likely to have a significant impact on California’s property tax system. Real estate owners and tenants should be aware of the effects of these propositions. Accordingly, we encourage you to study the details, make an informed decision, and VOTE!
This blog is written as of October 19, 2020. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs/newsletters on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.
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