What Are the Current Property Tax Laws in California?
Real estate planning can be complex, especially because property taxes can spiral into several thousand dollars, taking away considerable estate value. When creating a real estate plan, working closely with lawyers from a reputable law firm in California is crucial to ensure you’re up to date with real estate tax laws.
California’s Proposition 13 statute, passed in 1978, limits property tax rates to 1% for both residential and commercial properties and the growth rate of future assessments to 2% annually. The law provides taxpayers with two types of property tax limitations: a rate limit and an assessment limit.
While Proposition 13 creates some perverse incentives, it also inhibits split-roll property taxation. This created a need for an amendment of the statute, giving rise to the Proposition 15 Split-Roll tax initiative. The concepts of these laws can be complex to grasp, but skilled estate planning attorneys in California can provide an overview of how they can affect your estate plan.
What Does Split Roll Mean?
A tax roll is the official list of all properties due for taxation. California estate planning lawyers explain that a split roll applies a different tax formula to commercial properties than to residential properties. The formula can be a tax rate or assessment ratio.
The differentiation makes the tax code less competitive, ensuring uniformity in property taxation. However, the concept is non-neutral and sometimes economically inefficient. It strips taxable commercial and residential properties of Proposition 13 protections against reassessment while residential properties remain protected.
What is Proposition 15 Split- Tax Initiative?
Proposition 15 seeks to change the assessment regime for commercial property by requiring the assets to be reassessed according to the current market value every three years. Commercial and industrial property will be reassessed proportional to their commercial use.
Exceptions Under Proposition 15
Estate planning lawyers in the San Fransisco Bay Area highlight that the statute provides some exemptions for the following properties:
Small Property
Commercial property under single ownership with statewide property ownership of less than $3 million qualifies for exemption from reassessment. The $3 million threshold will be adjusted for inflation every two years starting January 1. 2025. The exemption also applies to up to $500,000 of personal property and all tangible personal property of various small enterprises
For the small property exclusion to be administered, a database needs to be instituted, providing access to property values. Estate planning lawyers in California can ensure you remain up to date with legal developments affecting property taxes.
Agricultural Land Exemption
Proposition 15 stipulates that real estate property used for commercial agricultural production should not be reassessed at market value. The exemption applies to land used for producing agricultural commodities for agrarian purposes. So, commercial and industrial fixtures and structures located on commercial agricultural real property would be subject to split roll.
The effects of tax initiatives can adversely affect farmers, agricultural businesses, and ranchers, given the extensive facilities, structures, and improvements, such as processing facilities often found on agricultural real property. Navigating the tax implications as an agricultural real estate owner can be complex, but skilled lawyers can help you.
How Does the Split-Roll Affect the Real Estate Landscape?
Estate planning lawyers serving in the San Fransisco Bay Area affirm that one of Proposition 15’s direct effects is higher taxes, which can potentially hurt business competitiveness. Generally, the state would rank better if property tax collections were more neutral, for example, with a levy limit. As a business owner developing a real estate plan, tax competitiveness is a vital consideration.
The stability and predictability of property taxes that existed under Proposition 13 are no longer guaranteed, making the overall property tax system more volatile. You could explore real estate investments in lower-taxed jurisdictions to reduce tax liability.
Conversion of Commercial Real Estate into Residential
The split-roll measure puts commercial real estate at risk of generating less revenue than promised. If you’re a property owner, higher taxes could mean lower rental income, making investing in and improving your properties challenging.
Consider converting commercial properties into residential ones, which can change the trajectory of your estate plan. The process entails many legal considerations, and it would be in your best interest to consult legal real estate experts to protect your wealth while minimizing the tax burden.
Impact on Residential Real Estate
The tax-related protection under Proposition 13 remains in place for residential properties. These include:
- Owner-occupied properties
- Rental properties, whether single-family or multi-unit dwellings
- Properties zoned as commercial or industrial but used as long-term residential premises
Taxes for these properties will continue based on their base year value, subject to annual adjustments that should not be more than 2%. The taxation continues until a change of ownership or a new construction is completed.
A Skilled Estate Planning Lawyer Explaining the Impact Split-Roll Tax Initiative
Proposition 15 is a split-roll tax initiative that has been met with various reactions. Proponents of the new structure argue that it will generate more revenue for commercial properties and avoid triggering the reassessment that happens upon a change of ownership. On the other hand, the structure will result in higher rents for businesses in an already challenging economy.
These factors are critical in estate planning as they determine how much value you can pass down to your beneficiaries. Talk to experienced California estate planning lawyers to gain more insights into the initiative’s implications and which estate planning tools you can use to protect your interests in your real property. The legal team at The Singh Law Firm can evaluate your case and guide you accordingly. Call us at 510-901-5375 for a FREE consultation.
