As Californians fill out their ballots this year, there will be two major property tax initiatives and several local tax measures to consider. Below is a brief overview of the significant California property tax measures at stake in this year’s election:
Prop 15: “split-roll” property tax increase
Perhaps the most contentious initiative on the ballot – at least from a tax perspective – Proposition 15, officially known as the Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative, aims to amend Proposition 13 and the treatment of property tax in California.
Generally, Prop 15 would amend the California State Constitution to require commercial and industrial properties (including land and buildings), except those zoned as commercial agriculture, to be taxed based on their market value. This would not affect residential properties, for which owners currently pay property tax based on purchase price. The proposal to tax commercial and industrial property at market value and residential property at purchase price is known as split roll.
If Prop 15 were to pass, the change from purchase price to market value would be phased-in beginning in fiscal year 2022-2023. Properties, such as retail centers, whose occupants are 50% or more small businesses would be taxed based on market value beginning in fiscal year 2025-2026 (or at a later date that the legislature decides on). As proposed, Prop 15 currently defines small businesses as those that are independently owned and operated, own California property, and have 50 or fewer employees.
There is an exception for business owners with $3 million or less of commercial or industrial land and buildings in California. These properties would continue to be taxed based on their original purchase price.
The measure also reduces the taxable value of each business’s equipment by $500,000 starting in 2024. Businesses with less than $500,000 of equipment pay no taxes on those items. All property taxes on business equipment are eliminated for California businesses that meet certain criteria and have 50 or fewer employees.
The state fiscal analyst estimated that, upon full implementation, Prop 15 would generate between $6.5 billion and $11.5 billion in revenue per year. The new tax revenue would be used to increase funding for local governments, K-12 schools and community colleges.
What is the current property tax situation?
In 1978, Californians approved Proposition 13, which requires that residential, commercial, and industrial properties are taxed based on their purchase price. The tax is limited to no more than 1% of the purchase price, with an annual adjustment equal to the rate of inflation or 2%, whichever is lower. When a property is sold again, its taxable value is reset to its new purchase price. According to the state Legislative Analyst’s Office, market values in California tend to increase faster than 2% per year, meaning the taxable value of commercial and industrial properties is often lower than the market value.
What are the fiscal effects of Prop 15?
Most owners of commercial and industrial land and buildings worth more than $3 million would pay higher property taxes. Only some of these property owners would start to pay higher taxes in 2022. By 2025, most of these property owners would pay higher taxes. Beginning in 2025, total property taxes from commercial land and buildings would be $8 billion to $12.5 billion higher in most years. The value of commercial property can change a lot from year to year; thus, the amount of increased property taxes could change a lot from year to year.
Prop 15 would, however, likely lower property taxes on business equipment by several hundred million dollars each year.
So what does Prop 15 entail? Effectively, it lifts the commercial property tax caps imposed decades ago by Prop 13 for land and properties worth more than $3 million.
Those in favor of the measure argue that it closes property tax loopholes benefiting wealthy corporations, cuts small business taxes, and reclaims billions of dollars to invest in schools and local communities.
However, opponents to Prop 15 argue that it would encourage businesses to leave California. Arguments against Prop 15 also include: increased cost of living, increased rent for small businesses that rent their properties, and a lack of accountability in terms of how the revenue is spent.
Prop 19: property tax transfers
Proposition 19, Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment, would change the rules for tax assessment transfers. Currently, in California, eligible homeowners can transfer their tax assessments to a different home of the same or lesser value, which allows them to move without paying higher taxes. Homeowners who are eligible for tax assessment transfers are persons over 55 years old, persons with severe disabilities, and victims of natural disasters and hazardous waste contamination.
Generally, Prop 19 would expand these special transfer rules for eligible homeowners, allowing them to transfer their primary residence’s property tax base value to a replacement residence of any value, anywhere within the state. The measure would also increase the number of times that the eligible homeowner can transfer their tax assessment from one to three years for persons over 55 years old or with severe disabilities (disaster and contamination victims would continue to be allowed one transfer).
In addition to modifying the transfer rules for eligible homeowners, Proposition 19 would also limit the tax benefits for certain transfers of real property between family members, expand tax benefits for transfers of family farms, and allocate most resulting state revenues and savings (if any) to fire protection services and reimbursing local governments for taxation-related changes.
How does Prop 19 affect inherited properties?
In California, parents or grandparents can transfer primary residential properties to their children or grandchildren without an increase in property tax (meaning, when the transfer takes place the property tax does not reset to market value). Other types of properties, such as vacation homes and business properties, can also be transferred from parent to child or grandparent to grandchild with the first $1 million exempt from re-assessment when transferred.
If Prop 19 passes, starting on February 16, 2021, the special rules for inherited properties would narrow. More specifically, Prop 19 would amend the special rules to include only two kinds of inherited property: (1) properties used as a primary home by the child or grandchild, and (2) farms. Properties used for other purposes, such as vacation homes or rentals, would no longer be allowed to use the special inheritance rules. In addition, Prop 19 would require the tax bill for high value inherited homes and farms to increase. When the inherited property is used as the resident’s principal residence but has a market value above $1 million, an upward adjustment in assessed value would occur. Note, that while the property tax would increase, it would not go up as much as it would if the property were sold to someone else.
What are the fiscal effects of Prop 19?
Overall, some parts of the measure would increase property taxes and other components would decrease them.
By expanding the rules for eligible homeowners to transfer their property tax assessments to a new property, more homeowners could get property tax savings when they move from one home to another. On the other hand, stricter rules for certain transfers of real property between family members could lead to higher property taxes for some inherited properties.
Effectively, Prop 19 would allow Californians who are 55 and older, disabled, or displaced by wildfires/other natural disasters, to carry their existing, lower property tax rates to new homes anywhere in the state. It would also narrow the tax benefits of familial home transfers by requiring children and grandchildren to physically inhabit passed-down homes if they are to claim lower tax rates. Tens of millions of additional tax dollars annually, derived from ownership changes and home sales, would flow to newly created funds for counties and firefighting.
Those in favor of Prop 19 argue that the initiative limits taxes on seniors, severely disabled homeowners, and wildfire victims, closes unfair tax loopholes used by wealthy out-of-state investors, and protects Prop 13 savings.
Opponents of Prop 19 claim that it would result in a billion-dollar tax increase on families, and take away a tool for parents to help their children by passing on homes and other property without any increase in property taxes.
As with any elections, there are local initiatives to consider as well. All across the state, California voters will have the opportunity to vote on tax measures voters that affect their counties and cities. Take the time to investigate your local ballot initiatives and any potential impact for you, your family, and your business.
Be sure to check your voter registration and set up a voting plan for this fall. Whether you will be voting by mail, drop off, or in-person, be sure to exercise your civic duty and make your voice heard.
How Squar Milner can help?
Our team of experienced and insightful tax professionals are willing to discuss the different measures on the ballot this year and the implications for your unique situation. If any voters approve any significant changes, our experts can work with you to understand what it means for you and your business. Our robust State and Local Tax (SALT) practice is here to work with you to develop the most optimal plan for your business.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.