Field polls about Prop 13 is like asking people if they would like to see their property taxes increased.  How many individuals own commercial property?  Most Californians know that Proposition 13 protects residences from sudden changes in property taxes, except when the residence changes hands. Proposition 13 is a ballot measure passed by the people of California in 1978 backdated to 1975.  Few Californians realize, however, and need to learn that Proposition 13 applied to all real property, including commercial, industrial, and rental real estate.

The results have not been good for California, nor even for homeowners as a group.  Single family residences change hands on the average once every five to ten years, and every time they do, their property tax assessment is updated to fair market value.  While some homeowners, especially elderly ones, have been in their homes for decades, the property tax assessments on the bulk of existing homes lag fair market values by less than ten years.  They are locked into their homes for a very long time.  New homes, of course, are immediately assessed at fair market value.

On the other hand, apartment houses and commercial and industrial property are usually held by companies or partnerships, and they change hands far less often.  If the property is not actually sold or transferred, there are two rules governing when a reassessment will occur for real estate which continues to be held by the same partnership, or company.  For properties that were owned by the entity at the time Proposition 13 was passed, reassessment will only occur if there is a change in the control of the entity owning it.  The change in control is defined as a single individual, or another entity, acquiring more than 50% of the ownership.  Therefore, for entities existing at the time when Proposition 13 was passed, reassessment of their real estate can essentially be avoided forever, by the expedient of making sure that no one person or company or partnership gains control.  Homeowners should be angry about the huge inequity.  For large, publicly-held companies (e.g., PG&E), it is virtually impossible, in the absence of a merger or takeover, that anyone will obtain 50% ownership.  For closely-held entities such as family partnerships or family corporations, that existed at the time of passage of Proposition 13, careful planning can usually make sure that ownership continues to be sufficiently dispersed among family members so that no one individual acquires 50% control.

For entities formed after the passage of Proposition 13, a different and less favorable rule applies. Reassessment of their real property will occur when 50% of the ownership changes hands, regardless of what effect that has on control.  Nevertheless, careful planning can often delay for many decades the time when a cumulative transfer of 50% of the interests has occurred. For example, if parents wish to transfer substantial real estate interests to their children, they can form a partnership, transfer to the partnership a number of properties which may have been sheltered from property tax increases by Proposition 13 for many years, and then transfer 49% of the partnership to their children.  With appropriate estate planning, there will be no reassessment of those properties, and only the limited increases in property tax allowed by Proposition 13, until both parents are deceased.  Another possibility is to transfer significant interests in real estate to children, sheltering the transfers from reassessment by the use of the $1,000,000 parent-to-child exemption.  If the parents and the children then transfer all of their interests into a family partnership or limited liability company, the children may already own 51% of the partnership, in which case there may be no reassessment of the property even after the death of both parents.

Thus, we have a situation where single family residences are reassessed with relative frequency, while apartments and commercial and industrial properties can often avoid reassessments for very long periods of time.

The perverse result has been a gradual but substantial shift of the property tax burden away from commercial and industrial property, and onto residential property.  On the face of it, this appears to be almost the reverse of what the voters presumably thought they were doing when they passed Proposition 13.

James U. Hall is the former president of the Santa Clara County Chartered Life Underwriters Society, General Agents and Managers Association.  John E. Upton was a supervisor of El Dorado County Board of Supervisors from 1990 to 1998, and the former president of the California State Association of Counties.

SENIOR SENATE FEDERAL PROPOSAL NO. 4
INTRODUCED BY SENIOR SENATOR MACK

LEGISLATIVE COUNSEL’S DIGEST
SFP 4: TAXATION: SALE OF PRINCIPAL RESIDENCE.

UNDER EXISTING LAW, CAPITAL GAINS TAXES ARE IMPOSED UPON THE SALE OF CAPITAL ASSETS.
THIS MEASURE WOULD MEMORIALIZE THE CONGRESS AND
THE PRESIDENT TO ENACT LEGISLATION THAT WOULD ELIMINATE CAPITAL GAINS TAXES ON THE SALE OF A PRINCIPAL RESIDENCE
BY A SENIOR CITIZEN OVER 65 YEARS OF AGE.
VOTE: MAJORITY.

SFP 4: RELATING TO CAPITAL GAINS TAXES

WHEREAS, FEDERAL AND STATE INCOME TAX LAWS IMPOSE CAPITAL GAINS TAXES UPON THE SALE OF CAPITAL ASSETS; AND
WHEREAS, A TAXPAYER IS ALLOWED TO EXCLUDE FROM INCOME UP TO $250,000 ($500,000 FOR JOINT RETURNS) OF GAIN FROM THE SALE OF A QUALIFYING PRINCIPAL RESIDENCE, AND
WHEREAS, SENIORS ARE SUBJECT TO CAPITAL GAINS TAXES
ON THE SALE OF THEIR HOME EVEN IF THEY MOVE TO ASSISTED LIVING UNITS, WHERE THERE MAY BE HEAVY UP FRONT FEEDS, AND
WHEREAS, THE DEATH OF A SPOUSE CREATES A DISPARITY IN TAX TREATMENT IN THAT AN ELDERLY COUPLE IS REQUIRED TO PAY CAPITAL GAINS TAXES UPON THE SALE OF THEIR HOME BUT A SURVIVING PARTNER CAN REDUCE HIS OR HER CAPITAL GAINS BY VIRTUE OF A STEPPED UP BASIS IN COMPUTING CAPITAL GAINS THAT IS ALLOWED UPON THE DEATH OF HIS OR HER SPOUSE; NOW, THEREFORE, BE IT
RESOLVED, BY THE SENIOR SENATE AND THE SENIOR ASSEMBLY, JOINTLY, THAT THE SENIOR LEGISLATURE OF THE STATE OF CALIFORNIA AT ITS 2009 REGULAR SESSION, A MAJORITY OF THE MEMBERS VOTING THEREFOR, HEREBY PROPOSES THAT LEGISLATION BE ENACTED TO ELIMINATE CAPITAL GAINS TAXES ON THE SALE
OF A PRINCIPAL RESIDENCE BY A SENIOR CITIZEN OVER 65 YEARS OF AGE; AND BE IT FURTHER
RESOLVED, THAT THE SENIOR LEGISLATURE OF THE STATE OF CALIFORNIA RESPECTFULLY MEMORIALIZES THE CONGRESS AND THE PRESIDENT TO ENACT APPROPRIATE LEGISLATION THAT WOULD ADDRESS THE CONCERNS SET FORTH IN THIS MEASURE; AND BE IT FURTHER
RESOLVED, THAT A COPY OF THIS MEASURE BE TRANSMITTED TO THE PRESIDENT AND VICE PRESIDENT, THE SPEAKER OF THE HOUSE OF REPRESENTATIVES, THE CHAIRPERSONS OF THE HOUSE AND SENATE COMMITTEES ON AGING, AND TO EACH SENATOR AND REPRESENTATIVE FROM CALIFORNIA IN THE CONGRESS OF THE UNITED STATES.
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SENIOR SENATE PROPOSAL NO. 6
INTRODUCED BY SENIOR SENATOR MACK

LEGISLATIVE COUNSEL’S DIGEST
SP 6: RELATING TO TAXATION.

THE CALIFORNIA CONSTITUTION GENERALLY LIMITS AD VALOREM TAXES ON REAL PROPERTY TO 1 PERCENT OF THE FULL CASH VALUE OF THAT PROPERTY. FOR PURPOSES OF THIS LIMITATION, “FULL CASH VALUE” IS DEFINED AS THE ASSESSOR’S VALUATION OF REAL PROPERTY AS SHOWN ON THE 1975-76 TAX
BILL UNDER “FULL CASH VALUE” OR, THEREAFTER, THE APPRAISED VALUE OF THAT REAL PROPERTY WHEN PURCHASED, NEWLY CONSTRUCTED, OR A CHANGE IN OWNERSHIP HAS OCCURRED.
EXISTING INCOME LAW IMPOSES CAPITAL GAINS TAXES UPON THE SALE OF CAPITAL ASSETS.
THIS MEASURE WOULD MEMORIALIZE THE LEGISLATURE AND THE GOVERNOR TO ENACT LEGISLATION THAT WOULD ALLOW SENIORS OVER 65 YEARS OF AGE TO MOVE ANYWHERE IN CALIFORNIA WITHOUT PAYING INCREASED PROPERTY TAXES AS LONG AS THEY ARE MOVING TO A LESS EXPENSIVE RESIDENCE, AND TO ELIMINATE CAPITAL GAINS TAXES ON THE SALE OF THEIR RESIDENCE.
VOTE: MAJORITY.

SP 6: TAXATION: SALE OF PRINCIPAL RESIDENCE

WHEREAS, THE CALIFORNIA CONSTITUTION GENERALLY LIMITS AD VALOREM TAXES ON REAL PROPERTY TO 1 PERCENT OF THE
FULL CASH VALUE OF THAT PROPERTY; AND
WHEREAS, FOR PURPOSES OF THIS LIMITATION, “FULL CASH VALUE” IS DEFINED AS THE ASSESSOR’S VALUATION OF REAL PROPERTY AS SHOWN ON THE 1976-76 TAX BILL UNDER “FULL CASH VALUE” OR, THEREAFTER, THE APPRAISED VALUE OF THAT REAL PROPERTY WHEN PURCHASED, NEWLY CONSTRUCTED, OR A CHANGE IN OWNERSHIP HAS OCCURRED; AND
WHEREAS, THE CALIFORNIA CONSTITUTION AUTHORIZES THE LEGISLATURE TO PROVIDE THAT A SEVERELY DISABLED PERSON
AND A PERSON OVER 55 YEARS OF AGE MAY TRANSFER THE BASE YEAR VALUE, AS DEFINED, OF PROPERTY THAT IS ELIGIBLE FOR THE HOMEOWNERS’ PROPERTY TAX EXEMPTION TO A REPLACEMENT DWELLING THAT IS OF EQUAL OR LESSER VALUE LOCATED WITHIN THE SAME COUNTY AS THE PROPERTY FROM WHICH THE BASE YEAR VALUE IS TRANSFERRED AND THE REPLACEMENT DWELLING IS PURCHASED OR NEWLY CONSTRUCTED WITHIN TWO YEARS OF THE SALE OF THE ORIGINAL PROPERTY, SUBJECT TO CERTAIN CONDITIONS; AND
WHEREAS, FEDERAL AND STATE INCOME TAX LAWS IMPOSE CAPITAL GAINS TAXES UPON THE SALE OF CAPITAL ASSETS; AND
WHEREAS, A TAXPAYER IS ALLOWED TO EXCLUDE FROM INCOME UP TO $250,000 ($500,000 FOR JOINT RETURNS) OF GAIN FROM THE SALE OF A QUALIFYING PRINCIPAL RESIDENCE; AND
WHEREAS, SENIORS ARE SUBJECT TO CAPITAL GAINS TAXES
ON THE SALE OF THEIR HOME EVEN IF THEY MOVE TO ASSISTED LIVING UNITS, WHERE THERE MAY BE HEAVY UP FRONT FEES; AND
WHEREAS, THE DEATH OF A SPOUSE CREATES A DISPARITY IN TAX TREATMENT IN THAT AN ELDERLY COUPLE IS REQUIRED TO
PAY CAPITAL GAINS TAXES UPON THE SALE OF THEIR HOME, BUT A SURVIVING PARTNER CAN REDUCE HIS OR HER CAPITAL GAINS BY VIRTUE OF A STEPPED UP BASIS IN COMPUTING CAPITAL GAINS THAT IS ALLOWED UPON THE DEATH OF HIS OR HER SPOUSE; NOW, THEREFORE, BE IT
RESOLVED, BY THE SENIOR SENATE AND THE SENIOR ASSEMBLY, JOINTLY, THAT THE SENIOR LEGISLATURE OF THE STATE OF CALIFORNIA AT ITS 2009 REGULAR SESSION, A MAJORITY OF THE MEMBERS VOTING THEREFOR, HEREBY PROPOSES THAT LEGISLATION BE ENACTED TO ALLOW SENIORS OVER 65 YEARS OF AGE TO MOVE ANYWHERE IN CALIFORNIA WITHOUT PAYING INCREASED PROPERTY TAXES AS LONG AS THEY ARE MOVING TO A LESS EXPENSIVE RESIDENCE, AND TO ELIMINATE CAPITAL GAINS TAXES ON THE SALE OF THEIR RESIDENCE; AND BE IT FURTHER
RESOLVED, THAT THE SENIOR LEGISLATURE OF THE STATE OF CALIFORNIA RESPECTFULLY MEMORIALIZES THE LEGISLATURE AND THE GOVERNOR OF THE STATE OF CALIFORNIA TO ENACT APPROPRIATE LEGISLATION THAT WOULD ADDRESS THE CONCERNS SET FORTH IN THIS MEASURE; AND BE IT FURTHER
RESOLVED, THAT A COPY OF THIS MEASURE BE TRANSMITTED TO THE PRESIDENT PRO TEMPORE OF THE SENATE, THE SPEAKER OF THE ASSEMBLY, AND THE GOVERNOR OF THE STATE OF CALIFORNIA.
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We are working with 2 interesting groups: http://www.4csl.org/ California Senior Legislature and http://www.cotce.ca.gov/. We are presenting at the last Commission meeting on July 16th in San Francisco. Also, Joe Coto’s colleague Lorraine Guerin is having a financial analyst look into the numbers our proposals might generate.

Jim Hall

Hello all:

Check out Wall Street Journal Opinion May 14th, 2009: Unions vs. Taxpayers by Steve Malanga: http://online.wsj.com/article/SB124227027965718333.html It might influence your vote on the initiative next week.

Regards,

Jim Hall

There are too many homeowners that currently benefit from Prop 13 to even think about an initiative to re-assess home and commercial property every twenty-five years. #1 A better and current approach would be to allow seniors over 65 to move anywhere in California without paying increased property taxes, as long as they are moving to a less expensive residence. #2 Prop 13 protections should be gradually removed from commercial and industrial property, increasing funding for schools and stopping the property tax burden from shifting to residences. #3 Capital gains should be eliminated for sale of a home by seniors over 65, to be replaced by a current taxpayer to stimulate tax rolls. This would free-up millions, possibly billions of capital for seniors that may have taken a hit in their retirement resources.

Regards,

James Hall

TO:

Marisa Lagos – SF Chronicle Writer

Supervisor John Avalos

David Chiu – Board President

Chamber of Commerce President Steve Falk

Supervisor Sean Elsbernd

Subject: S.F. looking at tax proposals for ballot article by SF Chronicle Writer Marisa Lagos

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/10/BAK6183QK2.DTL

Parcel tax, vehicle fee are among proposals. ‘Parcel tax and sales tax would eventually expire’. This means they are not a structural long-term increase in revenue.

Does it make sense to analyze capital gain of 15% Federal and 9.3% state when selling homes that have appreciated more than the current $250,000 per person exemption? Despite the very severe downturn in the home real estate market, there are 3 million homes in the state owned by people over 60. How many have appreciated more than the $250,000 exemption established in 1998 is unknown.

Check out our Aug. 30th, 2008 piece originally published in the Mercury News which is attached. Our blog is http://jameshall.wordpress.com/. Capital gain over 24% is definitely locking seniors in their homes that pay low property taxes that could be replaced by a current taxpayer.

We have submitted proposed legislation through senior Senator Anne Mack. Hopefully, one federal and state legislator will pick up on it. http://www.4csl.org/

Regards,

Jim Hall

Hello all:

For those of you that are interested, the SF Chronicle Monday June 29th debates Prop 13 pretty thoroughly. Here are the article links: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/29/MNUJ18EHVH.DTL&type=politics&tsp=1 and http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/29/MN8B18EL7H.DTL&type=politics. Authors Joe Garofoli and Michael Cabanatuan debate the crisis and the push by San Francisco assessors leading attempt to change the commercial side of Prop 13’s restrictions. …no mention of capital gains nor the ‘Step-Up-Basis’. We sent Mr. Garofoli our Aug. 30th, 2009 piece that was published in the Mercury News. It can be seen on our blog: http://jameshall.wordpress.com.

Jim Hall

PART 3: What statement or statements do you wish to have included in the “Resolved” clause of your proposal?  The resolved clause is a clause or a series of clauses asking the Governor and the Legislature (State Proposals) or, the President and Congress (Federal Proposals), to rectify the problem outlined in your “Whereas” clauses.  The more detailed the solution, the better chance you have of successfully seeing your policy objective through the entire legislative process.

RESOLVED: Seniors over 62 should be able to sell their homes free of Federal 15%

And State (9-10%) capital gain taxes.

RESOLVED: Seniors over 62 should be allowed to move anywhere in California

Without paying increased property taxes, as long as they are moving to a less

Expensive residence.

PART 4: If your proposal requires additional funds, cite potential sources and any impact on the state budget.  (How much will this cost and how will it be paid for?)

No Funds

PART 5: Please list any co‑authors who should be added to your proposal.

1. Sr. Assembly Members:                                       Sr. Senate Members:

Hi All:

For those of you that are still interested in our banking system, a Bill Moyers Interview with Bill Black is blood boiling. It is lengthy but worthwhile.

Here is the video tape of that interview:

http://www.pbs.org/moyers/journal/04032009/watch.html

You can view the transcript at http://www.pbs.org/moyers/journal/04032009/transcript3.html. Mr. Black is a former Director of the Institute for Fraud Prevention and carries experience from the Savings and Loan frauds of the 80’s. Here are comments from viewers: http://www.pbs.org/moyers/journal/blog/2009/04/william_k_black_on_the_prompt.html.

Regards,

Jim