Palm Desert Assembly member Brian Nestande said it best: “It must be a cold day in hell. The cow jumped over the moon. And pigs are flying somewhere.”
The Howard Jarvis Taxpayers Association (HJTA) has withdrawn its opposition to Assembly Bill 2372. AB 2372 proposes to close a longstanding loophole in the 1978 Proposition 13 (Prop. 13) property tax law. This statement follows HJTA’s indication last year that they and other tax watchdogs were “open to narrow legislation to fix the law.”
The laws implementing Prop. 13 enable incorporated property owners to skirt reassessment by gaming the legislation’s definition of “transfer of ownership.” Under the current scheme, reassessment is triggered only if one person or entity gains a majority ownership interest in the transferred property (or an entity which owns the property).
AB 2372 instead provides that a change in ownership occurs when 100% of the ownership interest in a property or a property-owning entity is transferred in a single transaction, regardless of whether anyone takes a majority stake.
The fact HJTA has decide not to oppose AB 2372 is a huge development for several reasons.
First, HJTA is Prop. 13’s foremost cheerleader and the namesake of the proposition’s godfather. The eponymous Howard Jarvis, a lobbyist for the Los Angeles Apartment Owners Association (LAAOA), was instrumental in the design and passage of the ballot initiative. His employment with the LAAOA says a great deal about what type of property owner the law was truly designed to benefit.
The Jarvis legacy organization’s refusal to fight the closure of a loophole benefiting corporate property ownership is a testament to Prop. 13’s inequitable tax protections.
Second, HJTA’s demurrer to the proposed legislation indicates the clouds of public misunderstanding are finally parting. According to the Los Angeles Times, a recent Gallup poll revealed 69% of voters were in favor of changing Prop. 13 to ensure that large, expensive properties are reassessed fairly when they change hands.
Californians are coming to an overdue realization: Proposition 13 needs serious reworking.
Taking taxpayers for a ride
Here’s how incorporated owners milk the law’s protections: under Prop. 13, property tax reassessment is triggered when any one entity attains a 50% or greater ownership stake upon the transfer of a property. Large property owners and their tax attorneys structure deals so properties are bought and sold through consortia and shell companies in which no one party holds a majority stake. Thus, when the transfer of property occurs, reassessment isn’t triggered since a change of ownership hasn’t taken place. Technically.
Just recently, this issue came up in Los Angeles when real estate giant Brookfield acquired millions of square feet of downtown office space. Brookfield avoided reassessment of extremely valuable commercial property by taking title via a new entity in which it has only a 47% stake. The rest of the ownership was split nominally with financial partners. No one person or entity acquired more than 50% ownership in the property, and thus no reassessment was triggered.
Such a maneuver is totally above-board and, from a business perspective, the savvy thing to do. It’s standard practice for big-league property owners and investors. In 2006, tech magnate Michael Dell restructured a multi-million dollar hotel purchase to avoid reassessment. Dell, his wife and other partners took minority stakes in a shell holding company which acquired the property in a highly public last-minute tax dodge. Dell pays property tax on just 43% of the $200 million purchase price.
And Westfield Group, the international operator of fabulously profitable malls, withered controversy last year for chronic under-assessment of their lucrative real estate holdings. A labor group exposed the huge discrepancy between the value of their Century City mall property reported to shareholders and the assessed value on which they paid taxes. That gap – nearly half a billion dollars – came to light even as they asked the City of Los Angeles for millions in subsidies to redevelop another nearby shopping center.
These are just the most high-profile examples. An entire cottage industry of law firms and tax consultants are dedicated to helping corporate property owners exploit the tax haven baked into Prop. 13. Take it from first tuesday readers themselves – one recent commenter with experience in this field says it best:
“…until California figures out there are people like me out there costing the state billions of dollars of lost – and fully appropriate – tax dollars, we will just keep on doing it.”
A lesser evil
We’re not here to argue that the state needs more or less revenue, or that this or that type of taxpayer deserves to pay more or less in tax. Such proclamations are beyond the scope of both this article and our expertise. Increasing taxes is neither the issue nor the goal here.
And we have made it abundantly clear we are not fans of Prop. 13. Prop. 13 is a deeply regressive tax scheme that places an outsize burden on younger, less-established homeowners while stifling sales volume and homeownership in times of inflated prices (read: today). There are better, fairer ways to protect property owners from excessive property tax burdens.
We know we’re in the minority here – and realistically, Prop 13 isn’t going anywhere. Repealing Prop. 13 is political suicide for anyone who dares to undertake such a project.
But that doesn’t mean we can’t improve how Prop. 13 works. A strong argument can be made for a system that ensures both a predictable cost of ownership for homeowners and a stable source of revenue for the operation of the state.
What we are arguing for, and what AB 2372 offers, is a just and rational application of our existing tax law. Eliminating this unequal taxation loophole – which gives corporate buyers a tremendous edge individual homebuyers cannot access – is a step in that direction.
It’s far past time for this. If we’re going to live with the uneven tax playing field created by Prop. 13’s unintended side effects, we can at least make sure it applies to everyone equally.
Seriously? Do you really think you can sell this attempt to begin to uunravel Prop 13 one brick at a time as a fairness issue. How many years in a row has California been voted dead last as a good place to do business. How many businesses does California (read JOBS!!) lose each year to states with better tax policies and more business friendly Governments. Start cutting into the big tax and spend policies of Sacremento and stop picking away at one of the few laws that protect California tax payers.
Just take a look at Texas number #1 State in job growth. Why because the tail is not waging the dog, the tail being this politically correct thought process of break, steal, cheating and just bleeding out anyone who has any wealth in the name of social justice.
Blows my mind that people are so stupid to believe this stuff. We need to turn the faucet off before there is no one left who can fill the bucket. Do those who think they will profit from sticking it to the landlord or the business owner not know the trickle down theory.
I was raised by a single parent who was on welfare, started out flat broke worked twice the hours spent little to no money and managed to become upper middle class, my applications say Caucasian, my parents and theirs were native Indian, Irish, German and the list goes on, who do you want to blame for my success.
It’s like my father told me when I was a young boy. He said the politicians would divide the people by race, religion, or wealth. Why because it allows them to manipulate them thru, envy, greed and anger all the while the politicians are stealing them blind.
Great article ! Notwithstanding the sour posts on this site by a few people, the facts are are as you stated them and that is why this new bill is supported by taxpayer groups, Democrats and the GOP.
Let’s not forget that SFR properties get reassessed when they sell. In these markets that creates much income to the state and also many cities as well as the counties impose a heafty transfer tax,$10 to $15 per thousand in many cities. Also property taxes can be increased 2% per year by the county assessor.
I question the accuracy of this reporting.
According to my sources…and based on ownership transfer questions on Form 565, Form 568, Form 100 and Form 100s…a property owned by a partnership, LLC, corporation or an S Corporation is subject to re-appraisal when 50% or more of the ownership of the entity has been transferred. The 50% or more rule is a cumulative % of ownership transfer since inception of the entity.
IMHO Proposition 13 was good for all California land owners when it was enacted and it is still good for California land owners. Proposition 13 effectively placed a permanent restraint on our California politicians’ ability to tax, tax, tax CA land owners and spend, spend, spend on “social” programs.
What California needs is more legislation like Proposition 13 that will place permanent restraints on our run-away bureaucrats.
At issue here is the proverbial “Camel’s nose in the tent”. As another reader alluded to, once you crack the mantle of invinciability of Prop. 13 the flood gates will be opened. Opened in the sense of further diluting it until finally you are left with a situation whereby property owners enjoy no real property tax protections from the greedy hand of government. In a state where marginal income tax rates are among the highest in the country, the one “tax relief” enjoyed by Californians exists in Prop. 13 protections. Let’s not let that be repealed.
Sadly, this article smells of the income inequality mantra but in this case, housing. Angry people, similar to Occupy Wall Street, who feel they got left out — and someone has to pay. Prop 13 is designed to prevent those fortunate enough (albeit through hard work, good or bad timing and monies) to have purchased a home not to be forced out due to excessive and never ending need for additional tax revenue. It’s a PROTECTION for the people who have a County that will do anything to feed a self-created debt. A regressive tax scheme? Really? Is this what we’ve come to? Blaming those that can or did for those that can’t or don’t.
When you talk about fair taxation I start scratching my head because there is no such thing. All governments at every level will absorb all money they can get and for them it is squeezing every penny out of everywhere possible. Anyone advocating fair tax to the gov is a fool. If the gov needs more money they should terminate some useless employees or streamline some of their out dated policies.The money needed to create or modify new laws usually comes from the special interests that benefit. If the people don’t resist all new taxes then we’ll be buried in new taxes over time.
I might support this only if the abuses of the Mello-Roose Act are also fixed. My home had over 5 new Special District Taxes, And Mello-Roose districts now pay for parkway maintenance, new park buildings, new swimming pools, etc., etc. and the Council sitting as the District Board just keeps extnding the pay-off dates for all the bonds. I thought Mello-Roose was designed to help Schools?
I totally disagree with the sentiment expressed in this article.
I have had minimal, but frequent experience with Assessors in a few California counties and I have seen the Legislature pass a law and then it is ‘interpreted’ by the lawyers at the Board of Equalization. The lawyers publish a “Letter To Assessor” telling them how to interpret the law, often giving it a different meaning. Then the county assessors run rampant with their own interpretation.
Don’t trust them – give them an inch and they’ll take a mile. They’ll push a liberal interpretation of the new law and we’ll all be disadvantaged.
That’s right. The government is crooked and they do not care about passing illegal taxes, such as the Fire Tax!! They have found ways to get completely around Prop 13 including tagging on sewer bills to property taxes (subject to the 2% increase every year). This is a runaway train situation and I’m seeing it happen right now! The taxes are out of control and crooks are winning.