Designed to protect long-term homeowners from a spike in property taxes as property values rise, California Proposition 13 freezes the tax assessed value of a property at its purchase price plus a nominal annual adjustment of not more than 2 percent.

Proposition 13 applies to both individuals and businesses that own property in California. And having been written to define a sale for commercial properties as a single purchaser having acquired at least a 50 percent share, a number of businesses have followed the letter of the law to avoid resetting property taxes upon purchase by structuring transfers to multiple entities, avoiding the 50 percent limit and reassessment trigger.

Sponsored by Assemblyman Tom Ammiano, Assembly Bill 2372 would refine what constitutes a sale for commercial properties in order to close the little loophole.  Under the bill,  a 90 percent change of ownership within a three-year period would also trigger a reassessment.

With support from the California Chamber of Commerce and California Business Roundtable, AB2372 passed its first committee hearing last week in a 6-2 partisan vote, leading Assemblyman Brian Nestande, a Republican from Palm Desert to quip: “It must be a cold day in hell. The cow jumped over the moon. And pigs are flying somewhere.”

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Comments from “Plugged-In” Readers

  1. Posted by SFCitizen

    I was not aware of the 50 percent rule related to ownership transfer. Does this mean that if I sold my TIC with 34 percent ownership in a three flat building that the buyer would not incur a reassessment?

    • Posted by gribble

      Commercial and residential properties have different rules. Right now it depends on what it is classed as. If you are residential, from what I know, any portion that is sold can be reassessed. Commercial that is what they are proposing to change to match the residential rules.

      That is my understanding. Feel free to correct me.

  2. Posted by BigV

    This is great news! There is no reason for prop 13 to apply to commercial property — that was never the intention of the law, and is robbing the state of significant sums of property tax! hurray for this!

    • Posted by Neil Koris

      All things being equal this would make sense. But I would oppose any measure which gives the state more money thereby relieving pressure for meaningful reform of state worker pensions and retiree health care. First things first.

      • Posted by Spencer

        totally agree. the pension system is broken. They should switch completely to 401K for a certain age cutoff and cut pensions to some degree across the board.

        • Posted by FormerAptBroker

          My 52 year old firefighter friend who is “retired” and getting over $12K a MONTH from his pension (plus free health, dental and vision care for his family) does not want any “reform” (and will be happy if they get rid of Prop 13 for commercial property)…

    • Posted by Sierrajeff

      Except this does nothing to take Prop 13 protection away from commercial property. In fact as I read it, both here and on SFGate, this bill seems like a major win for businesses – right now going above a 50% transfer (effectively, a change in control of the property) triggers reasseessment. Under Ammiano’s bill, you have to achieve a 90% change within 3 years. Seems to me that means we’re going to see a lot of 89% transfers of interests in commerical property, with an 11% “tail” being retained for 3 years and a day, and as a result *NO* reassessment (and no resulting increase in property tax revenues by the jurisdiction).

      I hope someone can tell me what I’m missing here, but this seems like a win for business owners, and something that will actually increase the impact of Prop 13, not ameliorate it.

    • Posted by Mystery Realtor

      Wrong BV! That was entirely Howard Jarvis intention.

      He was president of the Orange County Apartment Owners Assn and he (and Paul Gann) cleverly wrote it so that on it’s surface it seems fair, which it is to residential owners, but’s just another corporate tax break for the rich commercial owners with enough commercial trust attorneys to work the loop holes.

  3. Posted by J

    @SFCitizen and @Gribble
    Commercial and Residential are diff — selling a 34% interest in a Residential TIC definitely does result in a reassessment.

    • Posted by SFCitizen

      Thank you for the information. I hope this corrective legislation gets approved.

    • Posted by gribble

      To clarify my understanding: If you sell 34% interest in a Residential TIC it only triggers a reassessment of the 34% that was sold.

  4. Posted by Spencer

    I also think we could update the prop 13 for residential to no more than 3% instead of 2%. that doesnt completely repeal it , but would bring in significant new revenues and wouldnt lead to such a skewed tax liability. 2% is just too low , and i am a homeowner.

    i think a similar small change could be made to rent control from the 1.9% to allow 3% annual increases.

    i dont think a repeal is going to happen, but these small changes will help the market.

    • Posted by Andrew

      San Francisco rent control is based on 60% of CPI. It changes each year and the maximum is 7%.

      • Posted by gribble

        In the past twenty years it has never been higher than 2.9%. The average has been somewhere closer to 1.6% a year on average one the last twenty two years. During the first eleven years of rent control the average allowable was closer to 4.5%.

        I’m not sure what caused the approximately halving of the average rent increase. Perhaps the index it was originally tied to is broken?

        • Posted by anon

          Um, the index is tied to CPI, which is a decent measure of overall inflation. Overall inflation has been much, MUCH lower over the last twenty years compared to the 70s or 80s.

          The problem is that the cost of SF real estate has skyrocketed at much higher rates than inflation, due to folks like Futurist restricting supply (along with rent control itself). The “fix” is to allow the market to provide proper supply.

          • Posted by jill

            sorry i didnt know about the 60% of CPI index.

            Rent control and property tax increases should be the same so residents are treated similarly, at least until they get rid of both.

            if rent control is tied to 60% of CPI, then it seems reasonable to qualify for rent control, that your salary needs to be 60% of median or lower.

  5. Posted by poor.ass.millionaire

    This legislation makes sense, but they should tie that increase in revenues to VERY SPECIFIC uses that the people of CA generally agree on. Otherwise watch it get sucked into a giant vortex of paying off state entitlements.

  6. Posted by Sierrajeff

    I feel like I’m missing something…. Right now a 50% change in ownership triggers reassessment – which is as it should be, becuse that’s typically when you’re going to start seeing a change in control of the owning entity (such as an LLC). And while some entities try to structure sales as multiple sales of <50%, the fact is when they're found out, they're deemed to have transferred the property and triggered a reassessment.

    Now (if I'm understanding correctly) entities will be able to transfer up to *90%* of their interest in a property, without triggering reassessment. Seems to me the impact of that will be equity investors selling just 89% of their property interest and holding on to the remaining 11%, to avoid a reassessment…. even though with a transfer of 89%, a change of control event is quite likely to have occurred. (e.g., in most joint ventures that I see, the equity investor is already at 90 or 95%; so an outgoing equity investor could sell virtually all their interest, and not trigger a reassessment… that 89% could in fact be flipped over and over through the years, for ever-increasing values, and never trigger a reassessment…)

    What am I missing? 'Cause if I'm not missing anything, I'm going to immediately start marketing JV structures with 89/11 ownership percentages, that are protected from reassessment in perpetuity (so long as there's not a sale of the 89% more than once every 3 years).

  7. Posted by Grubber2

    I think the articles are missing a key point. The old rule still applies (the 50% rule) with a new additon (the 90% rule). In other words, under your scenario the change of ownership would occur because a single new entity owns more than 50% (your 89% owner) But, if you structured your hypothetical as 44.5%, 44.5% with the seller retaining 11%, then you may have a loop hole.

  8. Posted by badlydrawnbear

    There is no reason for Prop 13.

    FTFY

    • Posted by FormerAptBroker

      I bet you would be saying something different if you stretched and bought a place in Pacific Heights in 2010 for $2 million and the city now says it is “worth” $4 million and you need to pay an extra $24K a year in property tax…

      • Posted by Sierrajeff

        i.e., what happens in most of the rest of the country – and which, by the way, helps insure that the people living in properties can afford to keep them up. (You don’t see nearly as many tumbledown mansions in other areas that have regular reassessments, because there’s a relationship between being able to afford the property tax and being able to afford the upkeep.)

  9. Posted by Jackson

    I guess you didn’t live in California in 1978 when property values skyrocketed and real estate taxes ballooned. Of course, the property tax rate could have been reduced to be revenue neutral, but politicians loved the “free money” and spent accordingly.

    Hence, the move to cap property taxes via California’s Proposition 13.

    • Posted by anon

      Property values skyrocketed because inflation was skyrocketing.

  10. Posted by NJ

    “I bet you would be saying something different if you stretched and bought a place in Pacific Heights in 2010 for $2 million and the city now says it is “worth” $4 million and you need to pay an extra $24K a year in property tax…”

    Wait, you mean the way it is in most of the United States?

    In any event, I don’t think your hypothetical is accurate. If there were no Prop 13, tax pressures on all owners would keep tax rates and/or property values at bay, such that there is an equilibrium in which taxes are generally affordable for all homeowners. Certainly, a person who bought for $2 million in 2010 would not suddenly see a doubling in their taxes, as vast numbers of homeowners would then be to be unable to pay their taxes. Either rates would have to go down or, more likely, property values would stay down, as there would be more supply on the market due to certain homeowners being slowly priced out of their homes at the margins.

    • Posted by Jackson

      Said by NJ: “…..tax pressures on all owners would keep tax rates and/or property values at bay, such that there is an equilibrium in which taxes are generally affordable for all homeowners.”

      In a perfect world your theory would work. Californians expressed their displeasure with elected officials, were ignored, and instead, in rebuke, passed Article 13A of the Constitution of the State of California, i.e. Proposition 13.

    • Posted by Jackson

      addendum as said by NJ: “….as there would be more supply on the market due to certain homeowners being slowly priced out of their homes at the margins.”

      So you think it’s entirely equitable to tax certain “marginable” homeowners out of their property?
      You sound like a real Prince Charming.
      Other states such as Massachusetts and Illinois might tax retired elderly out of their homes but California voters have decided otherwise.

      • Posted by san FronziScheme (formerly known as lol)

        The cycle of property ownership is broken in California. When your kids are gone and you’re retiring, you have 1) more space than you needed before 2) less income. It’s natural that you’d downscale in your lifestyle. And if you do not, then you should be ready to pay the price.

        But in CA this cycle is broken. A 30-year old buying a house next to a retiree will often pay many times what the retiree next door is paying. In short, the younger worker is subsidizing the retired person. There’s one traditional way this is already done, and it’s Social Security. Why would property tax law impose stealth redistribution outside of the SS system?

        • Posted by Denise B

          Or maybe property taxes are an anachronism. We don’t tax any other forms of wealth. Why tax a person’s home and not his stock portfolio, airplane or art collection? It’s just a holdover from another time. And why should we have a tax that bears no relationship at all to the owner’s ability to pay, other than his ability to sell his home and move?

          Either we tax wealth or we don’t. I prefer an income tax. And California has made up for what we lost in property taxes with income and sales taxes. Fine by me. I like my taxes to be proportionate to my income.

          • Posted by Sierrajeff

            Well I’d certainly be in favor of doing away with the property tax altogether… it also solves some of the inequity between owner and renters.

          • Posted by san FronziScheme (formerly known as lol)

            Tough issue. everything has to do with use of services and how you get people to pay for it. Say someone inherits $100M and decides to leave the cash on his checking account. He also inherits a $10M house.

            His only contribution to the services he gets from the fire dept, police, schools, etc will be from the sales taxes.

            Then take another guy with no wealth, living paycheck to paycheck. He’s paying taxes AND sales taxes. Chances are he will be paying more than Guy #1.

          • Posted by anon

            What? Property tax bears no relationship to the owner’s ability to pay. LOL. Income taxes are an anachronism that has only appeared in the last century.

            Income taxes are horribly inefficient. I’d much rather see all tax on income eliminated and replaced by property taxes at the local level and consumption taxes at the federal and/or state level.

          • Posted by anon

            “Inequity” between owners and renters? What does that even mean? The person who actually fills out the check is not the sole “payer” of the tax. If you believe that, then we should just eliminate all personal taxes and rely solely on corporate taxes, because hey, then the corporations pay and no one else has to…lol.

            Property taxes are incredibly efficient, because they don’t penalize labor and encourage highest use for each and every piece of land, which is one of the few economic inputs that we can’t make more of.

          • Posted by shza

            Agree with anon. It would be much better policy to eliminate income tax and double property tax. Why would any reasonable policy maker prefer taxing (discouraging) productive labor over taxing sitting on land?

          • Posted by Sierrajeff

            Google “tax bads not goods” – a report analyzing Vermont’s tax base, and demonstrating how the state could eliminate both the income tax and the property tax, while generating the same revenue by instead taxing “bads” – things that impose negative externalities, everything from landfill fees to gasoline taxes. A very interesting notion.

          • Posted by anon

            @sierrajeff – sure, I agree with that. However, I disagree with the notion that a property tax isn’t already a tax on “bad” behavior, ie using the property for less than highest use.

            Straight pigovian taxes can usually not cover everything, hence the need for a georgian tax on top.

        • Posted by RobBob

          You’re missing out on a key ingredient, if you’re retired under california law you can get a one time transfer of your property tax basis. So you can cash out, downsize and still be paying the same amount as before.

  11. Posted by JR "Bob" Dobbs

    Yeah, in theory I’m against proposition 13 for the familiar reasons.

    However, in practice I support it. Primary reason is that I do not trust CA politicians on this. The property tax rate is set by law. If home values are re-assessed higher, homeowners pay more because the rate has already been set. If pols were reasonable, they would counter the rising values by lowering the rate to keep the actual taxes owed about the same (in inflation-adjusted terms). But the politicians are NEVER going to re-set the rate down so that the actual real tax payments stay roughly level. They will simply find something to spend the “free” money on.

    Lots of problems with Prop 13, obviously (unequal payments for similar properties, permits owners to let properties deteriorate, discourages efficient use, etc.) But it is the lesser evil. And this is why Prop 13 is never going away, at least for homeowners. It is supported by the voters by enormous margins. One plus is that in these low-inflation times, which are going to continue for many years, the “bad” Prop 13 effects are lessened as the inflation slack is reduced.

    • Posted by san FronziScheme (formerly known as lol)

      If the rationale on more just taxation is blocked by our mistrust of politicians, then one way to secure this is to do the following:
      - Say prop 13 is removed come Jan 1st 2015
      - All properties are reassessed at fait market value, and the rates are adjusted to provide the same overall taxation (+ a few % for good measure, since prop 1 is starving our schools from much needed funds)
      - Everything collected in 2015 over the inflation-adjsuted 2014 revenue goes to a rainy day fund. This rainy day found could be used to 1) compensate a drop in revenue during RE downturns 2) improve the public school system, and it there is anything left: 3) pay off the debt IF CA’s finances are in shambles and after a ballot initiative is approved by voters.

      • Posted by Cary

        Like the Social Security Trust Funds?

        • Posted by anon

          Not sure what you mean? The SS Trust Fund hasn’t been used for anything else besides Social Security.

          • Posted by san FronziScheme (formerly known as lol)

            Used, no.
            Borrowed against, yes…

          • Posted by anon

            That’s not really true either. The SS Trust Fund has invested its entire portfolio in US Treasury Bonds, is that what you mean?

          • Posted by san FronziScheme (formerly known as lol)

            What I meant is that the US Gov has borrowed against the SS Trust Fund. Sure they haven’t touched it, but they sure used it as collateral in a way. Otherwise why did Obama say we couldn’t cut SS checks during the Guv shutdown clusterfudge 2 years ago?

          • Posted by anon

            Because the agency that issues the checks was going to be shut down. It’s the same reason that you can’t withdraw cash from your bank on a holiday.

            I can agree that it would be better if SS could invest in something other than Treasuries, but that’s the way the law was written and updated over the years. Purchasing government debt with the fund is very different than “borrowing against it”.

    • Posted by NoeValleyJim

      California used to run a surplus before Prop 13. So the politicians didn’t spend it all. It wasn’t until after Prop 13 that California chronically had problems balancing its budget. We used to have better and better funded schools, too.

  12. Posted by poor.ass.millionaire

    Prop 13 is great for the CA RE investor. Keeps property values up, allows long time owners to benefit from fixed assessment. That, and the depreciation tax write off are an RE investor’s best friends :)

  13. Posted by shza

    Actually, that was the primary intention of the law. The “don’t let granny go homeless” canard was a marketing hook developed by the commercial lobby (who bankrolled Prop 13) to get all the rubes to vote for this.

    • Posted by poor.ass.millionaire

      It’s not a marketing hook. There are, and have been, hundreds of thousands of grannies that were able to keep their home and age in peace. Everything else is a side effect.

      • Posted by san FronziScheme (formerly known as lol)

        Yes, but they could have done that in a smaller place than the 4/3 they raised their kids into. That’s the whole issue right there: the usual cycle: “buy small, make kids, trade up, raise kids, retire, trade down” has been broken and nobody wants to (or has to) trade down, which created an artificial drop in supply.

        Turnover is part of life. Now it happens 25 years later than it should and young couples be damned.

        • Posted by parklife

          Or it doesn’t even happen 25 years later due to the ability to bequeath the low tax rates to your heirs. This aspect of Prop 13 is just plain ridiculous.

          • Posted by san FronziScheme (formerly known as lol)

            True, most of time they’ll move in if granny was living in a good zip code, but in some instances the heirs will have their own home already, with their own prop 13 entitlement, and will just cash out.

      • Posted by El-D

        OK fine. Let granny live there and pay an absurdly low tax based on a paleolithic-era valuation.

        BUT… let’s apply the unpaid portion of the “real” tax rate as a lien against the property.

        If granny’s property skyrockets in value, then she’s protected while she lives there. And since the whole reason we needed to protect her was because the property value skyrocketed, then there’s plenty of money there to pay the tax upon sale.

        If granny’s property value languishes, then no harm; no foul.

  14. Posted by Anon

    um, no. The vast majority of those grannies would have easily been able to get a reverse mortgage or something in order to keep their home and age in peace.

    • Posted by Jackson

      You are incorrect. Prior to 1978 when Proposition 13 passed there [were few] reverse mortgage options available.

      On February 5, 1988 President Ronald Reagan signed the FHA Reverse Mortgage bill into law; and in 1989 the first FHA insured loans were written. As you know, American Banks do not like to make mortgage loans without having the Federal government step-in to cover their losses. :)

      • Posted by anon

        Hence my “or something”. The idea that the market wouldn’t have created some kind of option is ridiculous.

        On top of that, if “thousands” of grannies were getting booted earlier than 1989, it’s quite likely that the law that you reference would have been enacted much sooner.

        Again, the ludicrous notion that we should design a law “protecting” people from housing that is skyrocketing in value and making them filthy rich is downright offensive.

        • Posted by soccermom

          Housing was not skyrocketing vs. other prices in the late 70′s when this law was enacted. People living on fixed pension incomes were being forced from their homes because of out-of-control inflation. They were not ‘getting rich’ as the cost of all goods and services were rising while their incomes were not.

          • Posted by Jake

            California was in the middle of a real estate boom when prop 13 passed in 1978.

            According to Karl Case of Case-Shiller, California median house price in 1976-1980 averaged 19.9% annual increase nominal and 9.3% annual increase inflation adjusted.

            The housing price increase outpaced income, resulting in about a net 50% increase in median house price/per capita income during this RE boom in California.

            He actually uses this period in California to support his claim that housing wealth does not closely correlate with per capita income.

          • Posted by anon

            Incorrect. Housing was booming in the late 70s, with annual increases double the amount of inflation.

  15. Posted by VancouverJones

    Back in the day when the demographics were changing the in the cities, the majority population started to live up to the democratic ideals of our country a tiny little bit. They said ok, you can live “kind of” close to us in this city (region), BUT you won’t be getting any of MY money to support the civic infrastructure. Howard Jarvis took advantage of the majority angst (I’m being kind here) against the minorities. He provided them an out… they woudn’t have to contribute money toward the common good for a long, long time (hey minorities don’t deserve good schools etc. anyway). BUT, Howard J. sucker punched the majority and gave the mother of all tax breaks to BUSINESS interests! So, here we are today. Prop 13 will indeed fall very soon. The massive majority demographic shift back into the city centers will put Prop 13 back on the radar. The majority population likes good schools in particular and safe, interesting, vibrant places to live in general (oh…don’t forget that EVERYONE likes good schools and good cities)! And business won’t mind loosing the Prop 13 benefits because they don’t want to kill the goose that laid the golden egg. Because the people who are moving back into the city are not ordinary people. They are highly skilled and highly compensated and energetic…. they will SPEND big money. Of course, the cruel irony is that those few minorities who chose to hang on to their properties in the (now highly sought after) cities will get booted out when prop 13 is reversed it. You guessed it the property tax will instantly rise to a very unaffordable level. And that’s just what Howard Jarvis promised would never happen. I’m not sure why everyone dances around this topic so much. It’s not like its ancient history!!! Am I making this stuff up? No one knows this? How hard can it be to call a not so old relative and discuss the topic? Or do we have to continue to have this discussion in a pure tax policy vaccum… devoid of any economic, social, political and urban planning context?

  16. Posted by David A.

    Prop 13 is the worst law ever. If there is anything we should tax, it’s skyrocketing capital gains on property. Other taxes in California take its place, and it has taken money away from schools to other uses. Pretty much every single real estate and public economist think its ridiculous.

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