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;








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             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  








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               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.









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          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  








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            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  








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            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