NOVEMBER BALLOT MEASURES – SIGNIFICANT TAX INCREASES
Proposition 15: Split Roll
This measure, known as the California Schools and Local Communities Funding Act of 2020 would change the manner in which commercial properties are assessed for determining property taxes, provide a source of additional tax revenues for schools and community colleges, and eliminate the business tangible personal property tax on equipment and fixtures for small businesses.
Currently, properties are assessed upon purchase, construction, or a “change in ownership,” subject to a 2% annual cap. As a result, the state is unable to capture additional tax revenue when properties remain exempt from reassessment for long periods of time. Proposition 15 would create an exception for commercial and industrial properties to the general rule that properties are reassessed only upon the occurrence of one of these events.
Beginning in 2022-23, and every 3 years thereafter, commercial and industrial properties would be reassessed based on their fair market value. For mixed-use properties, only the portion used for commercial and industrial purposes would be subject to reassessment. Residential properties, small value properties, and commercial agricultural land would be exempt.
The small value property exemption exempts properties valued under $3 million – with the caveat that that number may be determined by the sum of the value of all properties held by the same owner within the state. For example, if one owner owns three properties which cumulatively exceed $3 million in value, then the property is subject to reassessment.
The enactment of Proposition 15 may encourage owners of idle lots to sell in order to avoid the increased tax burden, which may promote development and the construction of new housing. For developed properties – the increased tax burden will be borne by commercial tenants, increasing the overhead and operational expenses of small and large businesses alike.
For schools and local communities, the additional funding would provide support for staff hiring, retention, books and educational resources.
If passed, increased taxes would be phased-in beginning with the 2022-23 calendar year, providing owners and tenants an opportunity to adjust to their increased tax obligations. The phase-in would also provide taxpayers whose property has been reassessed a reasonable timeframe within which to pay any increase in taxes. Properties at least 50% occupied by small businesses (i.e. companies with fewer than 50 full-time employees, that are independently owned, and own real property in CA), will not be reassessed until the 2025-26 fiscal year.
Proposition 19: The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act
The California Constitution permits a person over 55 years of age to transfer the base year value of their home to a property of equal or lesser value in the same county or another county that has adopted an ordinance allowing base year transfers. In addition, California law exempts the transfer of the principal residence, and first $1,000,000.00 of value of other real property, between parents and their children. These rules provide families and those over 55 years of age flexibility to transfer title to real property without triggering an increase in their tax liability.
If enacted, this measure would allow for the transfer by a person 55 years or older, or who is severely disabled, or a victim of a wildfire or natural disaster, of the taxable value (being the base year plus inflation adjustments) of their home to a replacement primary residence, located anywhere in the state and regardless of value. The base year transfer must occur within 2 years following the sale of their original primary residence and eligible individuals would be allowed to utilize this exemption 3 times.
Beginning on February 16, 2021, transfers of property from certain family (grandparents to parents and children and grandchildren (if all of the parents of the grandchildren are deceased)) would be excluded from the terms “purchase” and “change in ownership” only if they continue to use the property as a family home or a family farm, as the case may be. Otherwise, the property tax will be reassessed.
This measure would also establish the California Fire Response Fund. Any savings or revenue generated as a result of the measure would be used to monetize this fund, which would be used to fund fire suppression staffing by the Department of Forestry and Fire Protection as well as underfunded special districts.
In addition, any savings or revenue generated as a result of these changes would be used to fund the County Revenue Protection Fund. This would be used to reimburse local agencies if they suffer losses as a result of the implementation of the measure. Losses would be determined every 3 years.
If passed, this measure would provide that transfers of properties among family members that are not used as a family home are subject to reassessment, which may mean significant property tax increases. The intent is to capture tax revenue otherwise unavailable to the state when heirs inherit property used for rentals, or on only a part-time basis. Present law exempts both transfers of primary residences from assessment and the first $1 million of the value of real property other than primary residences. If enacted, inherited second homes that are not used as primary residences would be reassessed, providing the tax revenue to fund wildfire protection.
In addition, this measure would provide those over 55 years of age greater flexibility to transfer properties. Current law only provides for the transfer of one’s tax basis within counties to homes of equal or lesser value or to other counties within the state if authorized by that county, and only once (Propositions 60/90). Only ten counties authorize such transfers (Alameda, Riverside, San Mateo, Ventura, Los Angeles, San Bernardino, Santa Clara, Orange, San Diego, and Tuolumne), so the present rules are fairly restrictive.
By providing those 55 years or older greater flexibility to relocate within the state, homeowners that may otherwise be reluctant to sell because of the potential tax implications may be less fearful to do so knowing that they can transfer their tax basis to their new home. This may increase liquidity in the housing market, which is severely underbuilt, and provide additional inventory for prospective buyers. This additional housing inventory may, in turn, alleviate the upward price pressure of the current market.
These proposed changes are significant, and your businesses and estate plans may need to be revised according. MOBO LAW, LLP is here to help by guiding you through change.