BILL ANALYSIS SB 565 Page 1 Date of Hearing: June 20, 2005 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Johan Klehs, Chair SB 565 (Migden) - As Amended: June 9, 2005 Majority vote. Tax levy. Fiscal Committee. SENATE VOTE : Not relevant POLICY COMMITTEE VOTE : Not relevant SUBJECT : Property tax: Change of ownership exception: Domestic partners SUMMARY : Excludes the transfer of real estate between domestic partners from transfers resulting in the reappraisal of real property. Specifically, this bill : 1)States legislative intent to guarantee equality for all Californians, regardless of gender or sexual orientation, and to protect Californians from potentially severe economic and social consequences involving life crises. Refers to legislation: a) Enacted that attempts to fulfill promises of inalienable rights, liberty, and equality under the California Constitution; and b) Creating intestate succession rights of registered domestic parties (RDPs) identical to spouses. 2)Describes economic discrimination faced by lesbian, gay and bisexual Californians and encourages expanding the rights of RDPs with respect to property ownership in a manner consistent with the California Constitution. 3)Provides that a change of ownership for property tax purposes excludes transfers between RDPs. States qualified transfers include: a) Transfers to a trustee for the beneficial use of a RDP, to the surviving RDP of a deceased transferor, or by a trustee to the RDP of the trustor; b) Transfers that occur at death of a RDP; SB 565 Page 2 c) Transfers to a RDP, or former RDP, that occur in connection with the property settlement agreement or dissolution of a registered domestic partnership (Partnership); d) Creations, transfers, or terminations between RDPs of any coowner's interest; and e) Distributions of a legal entity's property to a RDP, or former RDP, in exchange for the interest of the RDP in the legal entity in connection with a property settlement or dissolution of a Partnership. 4)Is effective commencing with the lien date for the 2006-07 fiscal year (FY). In addition: a) Directs that amendments to property tax regulations that became operative on November 13, 2003 are to be applied retroactively to July 1, 2003; and b) States this bill furthers a vital public purpose for the retroactive application of adopted amendments to regulations to ease administrative burden in applying the new rules to taxpayers in order to protect the expectations of taxpayers who relied on the rules. 5)Provides for no reimbursement to local governments for any property tax revenue lost pursuant to this bill. EXISTING LAW : 1)Requires reassessment of real property to fair market value upon a change of ownership. Adopts the fair market value as the new base year value for real property. 2)Defines "change of ownership" as a transfer of a present interest in real property, the value of which is substantially equal to the value of the fee interest. Includes, but is not limited to: a) Creations, renewals, or extensions of a leasehold interest for a term of 35 years or more; b) Creations, renewals, or extensions of a possessory SB 565 Page 3 interest in tax-exempt property for any term; c) Creations, transfers, or terminations of any joint tenancy interest; d) Creations, transfers or terminations of any tenancy-in-common interest; e) Vestings of the right to possession or enjoyment of a remainder or reversionary interest upon termination of a life estate; f) Vestings of a real property interest in someone other than the trustor when a revocable trust becomes irrevocable; and g) Transfers of any interest in real property between a corporation or partnership and a shareholder or partner. 3)Provides numerous specific exclusions to changes in ownership such as: a) Transfers between co-owners that result in a change in the method of holding title, but does not change the proportional interests of the coowners; b) Transfers for the purpose of perfecting title to real property; c) Creations, assignments, terminations, or conveyances of a security interests; d) Limited transfers by a trustor into a trust; e) Creations or transfers of a joint tenancy interest so long as the transferor is one of the joint tenants after the creation or transfer; and f) Transfers of a lessor's interest in taxable real property subject to a lease with a remaining term of 35 years or more. 4)Excludes interspousal transfers and transfers between parents and children from a change of ownership. SB 565 Page 4 5)Provides that numerous transfers of ownership interests in a legal entity are not considered transfers of the real property of the legal entity. Requires that subsequent transfers of ownership interests be tracked so that when any person acquires more than 50% of the interests in the entity, a change of ownership is deemed to occur for all of the real property owned by the entity. FISCAL EFFECT : BOE staff estimate that the property tax revenue loss from this bill will be approximately $865,000 for each FY. Proposition 98 Fiscal Effect: None. COMMENTS : 1)Background : The system of property taxation in California rests largely upon an amendment to the California Constitution, approved by the voters in 1978, know as Proposition 13. Under Proposition 13, property was valued for tax purposes based upon its fair market value in 1975, with annual inflation adjustments limited at 2%. Properties are reassessed based upon fair market value only upon a change of ownership. Proposition 13 did not define "change in ownership" so the Legislature assumed responsibility for enacting legislation to interpret the constitutional amendment. Many of the statutes enacted after passage of Proposition 13 to define change in ownership have been done without specific Constitutional authorization. First, the Legislature defined the term "change of ownership. Then, in succeeding statutes, the Legislature provided specific examples of transfers that constituted a change in ownership and specific examples of transfers that do not constitute a change in ownership. Since passage of Proposition 13, the Constitution has been amended to provide additional change in ownership exclusions for certain family transfers. The amendments permit interspousal transfers, parent-child transfers, and grandparent-grandchild transfers. Although the transfers would meet the statutory definition for change in ownership, amendments specify that they will not trigger a reassessment of real property to fair market value. It is important to note that the interspousal transfer was authorized by statutes enacted more than six years before the constitutional SB 565 Page 5 amendment was passed by the voters as Proposition 58 in 1986. The amendment placed the existing statute into the Constitution, as well as expanding the exclusion to include parent-child transfers. The Constitution has been amended to permit transfers of base-year values from one property to another in certain circumstances. Included are transfers to replacement property following disasters, acquisition of the initial property by governmental entities, or disposition of contaminated property. Other examples are transfers of base year values by persons over 55 years of age or disabled persons, both of which are subject to additional restrictions. 2)The author asserts that RDPs experience unequal treatment with regard to property reassessments following inter-domestic partner transfers and that this bill will eliminate the inequality by excluding inter-domestic partner's transfers from creating a change in ownership. 3)Proponents state that this bill eliminates one of the many legally entrenched forms of economic discrimination that continue to confront gay, lesbian and bisexual Californians. Proponents proffer the following example: "Currently, if one of two domestic partners owns a home and dies, the property cannot usually be transferred to the surviving partner without a devastating property tax liability", and state that SB 565 rectifies this existing disparity. 4)BOE amended two regulations, Property Tax Rule 462.040, Change in Ownership - Joint Tenancies, and Property Tax Rule 462.240, The Following Transfers Do Not Constitute a Change in Ownership, in November 2003. The Property Tax Rule changes existing law to cover transfers of real property between RDPs through intestate succession following death of one RDP as well as the use of estate planning tools by RDPs to become original transferor status under joint tenancy. The Property Tax Rule changes are effective for transfers made on or after November 13, 2003. The transfers described in the Property Tax Rule changes are included among the transfers specifically authorized under this bill. 5)Property taxes are assessed as of the lien date (January 1 of each year) and paid with respect to the FY commencing the following July 1. This bill is effective for transfers SB 565 Page 6 occurring on or after January 1, 2006 (the lien date of the 2006-07 FY). 6)Committee staff note that reassessment of base year value for property tax purposes is one of the primary factors that determine whether individuals are able to retain real property that has appreciated following significant life changing circumstances (e.g., death, divorce, and dissolution). The assistance offered by this bill will eliminate most property tax concerns resulting from such circumstances and provide equal treatment for RDPs and spouses. . REGISTERED SUPPORT / OPPOSITION : Support American Federation of State, County and Municipal Employees, AFL-CIO Opposition None in file Analysis Prepared by : Kimberly Bott / REV. & TAX. / (916) 319-2098