• California Proposes Changes to Commercial Property Tax Rules
  • May 29, 2014
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • The California Assembly of Revenue and Taxation Committee approved Assembly Bill 2372 (Bill), proposed by Tom Ammiano (D) and Raul Bocanegra (D), by a 6-2 vote. The Bill, introduced on Feb. 21, 2014 and amended on April 1, 2014 and May 19, 2014, seeks to close an existing loophole which has been included in the California property tax rules since 1978. Under current California law, Proposition 13, commercial real property owners are able to structure their commercial real property sale transactions to avoid a tax reassessment when changing ownership. The current law triggers a change in ownership reassessment tax when a legal entity or other person obtains a controlling or majority interest. In the past, commercial property owners have structured transactions involving a change in ownership by dividing the property shares to avoid triggering the property reassessment tax.

    Progressive groups have been trying to close this existing tax loophole for years. Tom Ammiano, one of the Bill’s proposers and a long-time proponent of changing the current law, asserts that changing the law is necessary because the loophole causes the property tax burden to be shifted “onto the backs of homeowners and other individuals.” Ammiano has introduced five bills aiming to change the commercial property tax in the last six years. However, this bill is different because it is supported by both long-time proponents of the change, like The California Tax Reform Association, and groups who have opposed these changes in the past, such as the California Business Roundtable, the California Chamber of Commerce, and the California Business Properties Association.

    The current version of the Bill reflecting a compromise made with certain business groups, proposes to close the property tax loophole by including that a reassessment of the property tax will be triggered “when 90 percent or more of the ownership interests in a nonaffiliated legal entity are sold or transferred in a single transaction to a nonaffiliated legal entity or person, whether by merger, acquisition, private equity buyout, transfer of partnership shares or any other means by which a nonaffiliated legal entity or person acquires the ownership interests of another legal entity,... the purchase or transfer of the ownership interest is a change of ownership of the real property owned by the legal entity, whether or not any one legal entity or person that is a party to the transaction acquires more than 50 percent of the ownership interests.” This “closing of the loophole” would be in addition to the restrictions under current law.

    The Bill would also require strengthened reporting requirements and enforcement when a reassessment occurs, and greater transparency for deeds filed for real property and financial transactions. For example, the old law imposed a 10 percent penalty tax for any failure to report a change in ownership to the State Board of Equalization; the Bill imposes a 15 percent penalty tax for failures to report changes in ownership.

    The Bill is currently being considered in the Assembly Appropriations Committee. If eventually signed into law as is, the Bill would take effect immediately as a tax levy. Taxpayers that are thinking of purchasing commercial real property located in California should consult with their tax advisors regarding the impact of this proposed Bill, as structuring methods that worked in the past to avoid triggering a property tax reassessment may no longer achieve the desired results.