California initiated a major revolution when the people passed the legendary Proposition 13 back during the 1970s. As many people know, Prop 13 prevents reassessment of real estate until it changes hands. (In the meantime, the valuation can only increase by a tiny percentage every year.) This has been simply wonderful for homeowners who stay in one place for decades, less so for the upwardly mobile, or those who simply have to relocate for any reason. While it was undoubtedly motivated by a desire to help fixed income seniors “age in place” instead of being driven out by skyrocketing taxes (as happens in many states that lack such protections ), over the last three decades a slow shift has taken place under which homeowners actually bear a larger burden of property tax (relatively speaking) than they did before Prop 13.
How did this happen? Mostly a number of loopholes in the law that permit sophisticated businesspeople to avoid reassessment of properties even when there is some change of legal ownership. As the Contra Costa Times explains, reassessment is only required “ when a person or legal entity obtains more than 50 percent of the property, allowing corporations to structure sales to avoid a reassessment” thus, “three new owners can join together to buy a property so none owns more than 50 percent, allowing them to continue paying lower taxes.”
It took a state budget crisis to rival that of Greece to bring legislation to eliminate these loopholes, but it finally exists in the form of Assembly Bill 2492, which redefine any ownership change as 100 percent of property being sold, regardless of the number of new owners.
While I am in favor of limiting the tax burden on businesses, as well as that on individuals, I have the sneaking suspicion that things have really gotten out of hand around here with these kinds of transactions. Indeed, even without such trickery, one might legitimately question the application of the principles of Prop 13 to businesses such as Disneyland. As I previously blogged, according to a 2003 L.A. Times article, “It’s no wonder Disneyland’s owners call their amusement park the ‘happiest place on Earth.’ For much of its land, Disney pays only a nickel per square foot in property taxes.” (Since the property has not changed hands, Disney’s assessment would barely have budged in the interim.)
As to the politicians who argue that businesses would desert the state en masse if any changes were made to Prop 13, one has to ask—where would they go? I’m not aware of any state with more favorable property tax system. (Please feel free to correct me if I’m mistaken.) And, even taking into account the proposed changes, California still offers one of the most tax-favored real estate investment climates in the entire world, together with a favorable climate, population growth, and a highly diversified economy, all factors that bode well for real estate investors over the long term.