New Challenges to California Proposition 13

By Abe Livchitz, CPA, Senior Tax Manager & Jimmie Machlan, CPA, Tax Manager
ASL Real Estate Group

This November, voters will be deciding many national and state issues. Californians will be asked to make important decisions on measures impacting commercial property owners and residential homeowners. California Proposition 15, also called the “split roll tax” would require commercial and industrial properties to be taxed on current market value. California Proposition 19 would change certain property tax exemptions and transfer rules. If either proposition passes, the changes will not only impact how property tax is calculated but also result in significant tax increases for many property owners. The State Legislative Analyst estimates that in 2025 property tax revenues could be $8 to $12 billion higher if Proposition 15 is enacted. (Official Voter Information Guide – Prop 15)

California Proposition 15

This proposition,  entitled “Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative”, would change the tax base used to calculate real property taxes for certain commercial and industrial properties.

Under current regulations enacted in 1978 as Proposition 13, residential, commercial, and industrial properties are taxed based on purchase price. The tax is limited to 1% of the purchase price with an annual adjustment equal to the lesser of inflation or 2%. Since property has appreciated at a greater rate than 2% per year, the taxable base is often far less than the market value. Under Proposition 13, property is not reassessed until there is an ownership change.  Under Proposition 15, properties that have been purchased many years ago would have a significant increase in property taxes as the tax base would be increased to the property’s current market value.

Residential and multifamily properties would be exempt from the changes made by Proposition 15.  There is also an exemption for any property where the property owner has less than $3 million of California property holdings.

If passed, there would be a phased-in approach starting with the 2022-2023 property tax assessments.  For properties in which “small businesses” account for 50 percent or more of the occupied space, reassessment would be further deferred until the 2025-26 assessments. For this purpose, a “small business” is defined as those that are independently owned/operated, own California real property, and have less than 50 employees.

Since this ballot proposition is an initiative, some important details are missing. It requires the state legislature to pass new legislation outlining the exact phase-in timeline, reassessment schedules, and the appeals process.

The changes made by Proposition 15 would impact tenants as well as building owners. Commercial leases often require property taxes to be paid by tenants so any tax increase would be borne by the tenant.

California businesses pay property taxes on their personal business property such as machinery, equipment, furniture, computers, etc. Proposition 15 would create a $500,000 exemption for assets subject to the business property tax so many businesses would be exempt or pay less business property tax.

California Proposition 19

Proposition 19, also known as the “Property Tax Transfers, Exemptions and Revenue for Wildfire Agencies and Counties Amendment”, would change the rules governing exemptions from property tax reassessment associated with two types of property transfers: qualified transfer of property tax base for a personal residence and property acquired by inheritance.

Under current regulations, eligible homeowners can transfer their current property tax base within or between certain counties to a new principal residence with the same or lesser market value. This permits eligible homeowners to move and purchase a new home without the burden of paying higher taxes. An eligible homeowner must be over 55 years old, or an individual with severe disabilities, or a victim of a natural disaster. No benefit is allowed if the new home’s cost exceeds the former home’s sales price.

Another exemption currently available prevents reassessment on the inheritance of a personal residence and up to $1 million of assessed value of other real property by children or grandchildren (when the parents are deceased).

If passed, Proposition 19 would allow eligible homeowners to transfer their tax base anywhere in the state with no reassessment and the purchase of a more expensive home would be allowed resulting in a partial reassessment. There would also be an increase in the number of times a transfer could be made, from one to three times (except for natural disaster victims).

Unfortunately, Proposition 19 would eliminate the inherited property transfer exemption when the home is not used as the child’s or grandchild’s primary residence.  Even if the home is used as a primary residence there would be a partial reassessment if the property’s value exceeds its tax base by over $1 million.

These rules would also be applied to certain farm properties as well.

Under the proposition, the ability to transfer $1 million of other real property is eliminated.

These potential changes will create unique estate planning challenges as homeowners seek to minimize property tax increases.

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These propositions will significantly increase property taxes paid by California businesses and individuals inheriting real estate. Many property owners are concerned that if these propositions pass, it may open the door to the elimination of other property tax protections. While it is unknown whether either of these measures will receive voter approval, it is important to understand the potential impact on your business and possible estate planning. If you have questions or need assistance with an accounting or tax issue, Abbott, Stringham & Lynch can help. For additional information, call us at 408-377-8700 or click here to contact us.