Prop 13 – Fixing the Loopholes

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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.

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  1. Thanks for the updates, Flo. As a former (and likely future) So Cal resident, I’m not very fond of Prop 13. While it had good intentions, a repeal of this law (which will never happen) would likely start California back on the path to solvency. While many will likely have some troubles with their re-adjustment, the law really does burden homebuyers who aren’t using sophisticated entities to do so. I actually recall paying more in taxes for my condo almost a decade back than Warren Buffet was paying on his luxury home. It makes no sense. In this case, I think that closing some loopholes is certainly a good idea and I hope they are successful. If not, I’ll remember this post when the time comes to buy my future home.

  2. I wish we in Philadelphia, PA had something like Prop. 13, with the highest transfer tax in the country the City and State still cannot pay their bills and are running huge deficits.

    The solution is to uncouple all taxes from real estate and make all taxes direct on the taxpayer.
    It is so easy to hide the effects of transfer taxes as most are part of the mortgage payment.
    With direct taxation most of the politicians who have been wasting our tax dollars would have been swinging from a hangman’s noose long ago.

    This country is in the very near future going to be destroyed by taxes and hyperinflation, if our fiscal house is not put in order.

    Greece is a mirror of our States, with about the same GDP as California and like Greece, California has no way to just print money and thank God for that.

    California has too many folks working in government (overhead) as does Greece.
    Government cannot be all things to all people, and cannot cure the ills of society by redistributing the wealth of its citizens.

    Local governments need to deal with local issues, and only in the frame work of what is allowed in the Constitution, anything else leads to destruction as we now witness.

    • Thank you Daniel for your comments. I agree with the basis of Prop. 13: without something like Prop 13, owning real estate becomes less like traditional ownership and more like renting the property from the government — but without rent control! And as budgets get out of whack, governments will just jack up property tax rates.

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