Over the past three years, California has lost nearly a million people to states like Texas due to the housing affordability crisis. It’s bad enough that during a time when folks are concerned about generational wealth and passing on assets to their children without being taxed into oblivion, Californians passed two tax-related amendments over the past three years. It will be three if the repeal of the voter-enacted changes to property tax rules for transfers between family members gains enough signatures in time for the 2024 November ballot.
Last month, Random Lengths News publisher James Allen interviewed Los Angeles County Property Assessor Jeffrey Prang about these stress points and more. The interview can be viewed at www.randonlengthsnews.com.
Prang was first elected to County Assessor’s office in 2014, but before that, he served on West Hollywood’s city council for nearly 18 years.
“I also have been working in the public sector for most of my adult life. I was a city administrator,” Prang said. “I spent a number of years in the City of Los Angeles, working for the city council and then later at the Department of Animal Services.”
Among the topics of conversation between the two was the disparity in the way the state treats wealthy families and corporations in regard to property assessments.
Oftentimes corporations with long-term leases with the Port of Los Angeles would sell or merge with another corporation without necessarily triggering a reassessment in the same way a homeowner would when selling his primary residence. Like when Union Oil sold its refinery to ConocoPhillips.
One would think that the sale of a refinery would trigger that kind of assessment because it’s basically a transfer of property. But it doesn’t. This is true for all of the many different properties that are held by a corporation that buys another corporation. As a result, the people of the county and the state are actually being shortchanged behind these corporate sales.
Prang agreed, noting that under California law, in order for a sale or transfer of property to cause a reassessment, 50% ownership has to change.
“This is actually a loophole that really only benefits corporate entities where they transfer less than 50% of an asset, sometimes over a period of time, and not trigger a reassessment,” Prang said. “So they can keep the property taxes low.”
Prang highlighted Michael Dell’s 2006 purchase of Fairmount Hotel in Santa Monica, the CEO of Dell Technologies. The hotel was assessed somewhere around $80 million, but the new market value of that hotel was closer to a quarter billion dollars.
That would have been almost a three-time increase in property taxes. So instead of purchasing the property to take full ownership, Dell assembled a limited liability company, or LLC, where he and members of his family purchased a minority share, and then that LLC purchased the hotel. Because no one individual or entity got 50% ownership, it was not considered to be a transfer even though 100% control of the hotel changed, the law determined that 50% ownership did not change. Thus, it was not really assessable.
“That’s really inequitable,” Prang said. “It’s the part of the system that really needs to be changed.
Even the Howard Jarvis Taxpayers Association, the defenders of Prop. 13, indicated that the law was not intended to create strategies to evade taxation. It was intended to stabilize taxation. Prop. 13 is the 1978 California Constitutional amendment that rolled back most local real estate assessments to 1975 market value levels, limited the property tax rate to 1 percent plus the rate necessary to fund local voter-approved bonded indebtedness, and limited future property tax increases to a maximum of 2% per year.
“This 50% rule is done by statute,” Prang said. “So they can pass a law that says, those properties can be reassessed, but no one has been able to get it done.”
Prang surmises that advocates in favor of reforming Prop. 13 don’t want to do it piecemeal.
“They want the whole thing to go away,” Prang said. “They are afraid that if they just take little pieces of it to try to fix those broken pieces they will lose their momentum toward greater reform.”
Prang said he doesn’t agree with that perspective.
“I’ve been in government now for most of my adult life and I’ve learned sometimes the incremental approach to change, though not very satisfying, is the best way.”
The career administrator noted that Prop. 13 is so polarizing, that it’s almost impossible to have a rational conversation. It’s not as if there isn’t consensus in the state legislature, Prang said.
“There’s this legal corporate loophole, which allows them to transfer property without being reassessed. There are very few people who think that’s a fair and equitable system,” Prang said.
“If we can agree in Sacramento that there is a solution to that and address it, maybe we can look at other elements of the law that might also need to be looked at. We just need to have all sides recognize that no law is perfect.”
Prang argues that this zero-sum state of politics in regard to Prop. 13 is what leads to poorly crafted legislation having unintended consequences. He called the 2020 Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment known as Prop. 19,a dumpster fire.
“It’s an absolute crappy piece of legislation rushed through the legislature in the last week of the legislative session,” Prang said. “They didn’t do their due diligence. They didn’t vet it through expert assessors who are responsible for administering it.”
Prang noted that after Prop. 19’s passage, his office spent the next couple of months trying to dissect it and find out what they could and could not do to implement it.
“The legislature gave us two months to put it into effect,” Prang said. “I can tell you that we could not have done it in less than 12 months. Eighteen to 24 months was much more realistic because it totally changed the way we operate. [The legislature] didn’t give us any resources in terms of personnel or money even though it changed the way that our operation works.
“So let me tell you what Prop. 19 does. It does two things. One is, I think a lot of people would think it’s beneficial … it allows seniors over the age of 55, the disabled, and people who are victims of natural disasters like a flood or earthquake to transfer their property taxes when they sell their home and buy a new one. So if you owned your home since 1990 and have a relatively low tax base, you can buy a new house and take that tax base with you. So you’re not going to pay new taxes in your new more expensive home. It allows you to move anywhere in the state of California to buy a home of any value and to transfer that tax base three times, or if you’re married — six times, so the tax base becomes portable.
“So seniors, especially, want that sort of stability. The challenge with that is you lose revenue by stabilizing those taxes, so local governments were very concerned. So, what the authors did to compensate, and they didn’t talk about this publicly because it’s not very popular, but they eviscerated family inheritance benefits,” Prang said. “Under the old law, if you were a parent and you want to leave your property to your children, you can leave them your home and up to a million dollars and other property, without being assessed. So, your kids will have a tax increase. Prop. 19 rolled a lot of that back. Under Prop. 19, the only property that your children can inherit without reassessment is your primary residence. There are some conditions to that. So for them to adhere to your home and the tax base one, they have to move into that house within 12 months and they have to file the homeowner’s exemption and as long as they want that tax base to continue, they must live there in perpetuity.
Secondly, it puts a cap on how much value of that home can be transferred to the children that would be exempt from taxes or transfer the old tax base. The rule of thumb is that if the house is worth less than a million dollars, you will inherit the home and your taxes will remain the same if it’s over a million dollars. The median sales price of a single-family home in LA County is about $900,000 ― that’s half the properties in the county. The value over 1 million dollars will be assessed at market value. The first million dollars, you’ll inherit your parents’ rate over a million dollars, and you’ll get a market rate. And for those people who inherit their parents’ home and don’t plan to live in it, that home will be reassessed to market rate which may cause them to have to sell the property, Prang explained.
Indeed, the past August, the California Attorney General’s office released the Repeal of Voter-Enacted Changes To Property Tax Rules For Transfers Between Family Members. The initiative has to gain 874,641 valid signatures in order to get on the November 2024 ballot. The deadline is Feb. 20.