“It must be a cold day in hell. The cow jumped over the moon. And pigs are flying somewhere.” That was how Assemblyman Brian Nestande, R-Palm Desert (Riverside County) responded after the announcement of bipartisan deal in the California legislature to close an apparent “loophole in Proposition 13.
What is Proposition 13?
In 1978, California residents passed Proposition 13, which resulted in significant reductions in property taxes on homes, businesses and farms. Proposition 13 accomplished this by rolling back the property tax values to the 1976 level. Property tax increases were then limited to no more than 2% per year, as long as the property was not sold. If the property was sold then the property taxes would be reassessed at 1% of the sale price, and thereafter, subject to the 2% yearly cap.
Proposition 13 further capped the rate of any ad valorem tax on real property at 1% of the full cash value of the property.
Proposition 13’s tax loophole
Recently, Proposition 13 has been criticized for an apparent loophole written into the law. The loophole concerns the definition of “change of ownership” that triggers a property’s value to be reassessed and increases taxes (assuming the assessed value increases). If there is no change of ownership,” however, any future property taxes may not be increased by more than 2% each year.
Under the current law, if a purchaser obtains more than 50% of a property, there is change of ownership. A purchaser obtaining less than 50% does not constitute a change of ownership. This allows property purchase transactions to be fashioned in such a way to prevent the property from being reassessed and to prevent the buyers from having to pay a higher tax rate.
Proposition 13 criticism
Assemblyman Tom Ammiano, D-San Francisco and Raul Bocanegra, D-Los Angeles, proposed a bill, AB2372, to close this loophole. The new bill would amend the change of ownership provision to state “that as long as 90 percent ownership of a property changes hands, it’s considered a change in ownership and should be reassessed.” Bill sponsor, Assemblyman Bocanegra has written that this legislation seems like “common sense.”
The loophole has been criticized for permitting multi-million deals to be structured in such a way that avoids property value reassessment for tax purposes. Michel Dell’s purchase of a Santa Monica Hotel in 2006 has been cited as just one example. It is believed that the new bill could benefit California residents by possibly generating “up to an additional $100 million a year for state and local governments to use on education, public safety officers and street repairs.”
Assemblyman Bocanegra believes that it is not fair for a select few individuals to take advantage of the loophole when homeowners and the average business cannot.
Contact a California tax law attorney
If you have any state or federal tax questions, our experienced California tax law attorneys can help. Janathan L. Allen, APC’s tax law attorneys have a broad range of experience advising domestic and foreign clients to help you protect their personal and business interests. Contact or visit one of our California offices today for a free case consultation.