There is no loophole in Proposition 13

property taxFor decades, California progressives have complained about a “loophole” in Proposition 13 that unfairly benefits the owners of commercial real estate to the detriment of homeowners. This characterization has been widely accepted by the mainstream media with little critical analysis.

There is no loophole in Prop. 13.

There is, however, an ambiguity in the statute implementing the measure that relates to the “change of ownership” rules. That ambiguity can be easily addressed by a statutory amendment without doing violence to Prop. 13. Both the business community and the state’s preeminent taxpayer organization, Howard Jarvis Taxpayers Association, agree that this change is necessary.

Senate Bill 1237, by state Sen. Patricia Bates, would address this technical tax issue involving fictitious entities such as limited liability corporations and complex partnerships in a way that is wholly consistent with Prop. 13.

Specifically, under Prop. 13, when you sell your home, it is reassessed to the full market value for the new purchaser. Of course, the new buyer still enjoys the 1 percent rate cap and the certainty that the taxable value of the property will not increase more than 2 percent per year.  But for properties that have been under the same ownership for decades, the “taxable” value of the property can be just a fraction of the market value. That is why Howard Jarvis and Paul Gann provided in Prop. 13 that upon change of ownership, property would, at least initially, be taxed at market value. After purchase, it receives the same 2 percent limitation on annual increases in taxable value as all other properties.

But some clever tax attorneys have advised clients that they can avoid Prop. 13’s intent to treat commercial transactions the same as homeowners by creating fictitious entities that themselves are transferred in an inappropriate attempt to avoid reassessment. This violates the spirit of Prop. 13 and actually gives the enemies of Prop. 13 a justification for arguing that all of Prop. 13’s protections should be stripped away for commercial property. It also explains why public employee unions continue to oppose bills such as SB1237, because it would deprive them of their best argument in the ongoing fight to remove Prop. 13’s protections for commercial property. Indeed, the enemies of Prop. 13 are already working to qualify this very initiative for the 2020 statewide ballot. …

To read the entire column, please click here.

Comments

  1. I’ll bet there are fewer commercial properties that have not been reassessed, as a percentage, than residential as mom n dad pass house along to kids who then RENT IT OUT and pay the low rent of mom n dad’s original purchase. Single family homes that are rented out should be reassessed. Idea was for the family to be secure, not to allow extra rental income due to low tax expense

  2. Victoria Smith says

    We must keep Proposition 13 to protect us from even more onerous taxation by the out of control CA state government.

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