BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:  April 9, 2012

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair
                 AB 1700 (Butler) - As Introduced:  February 15, 2012
           
           
          Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Property taxation:  change in ownership:  exclusion.  

           SUMMARY  :  Excludes from property tax reassessment a transfer of 
          co-tenancy interest in a principal residence if the principal 
          residence was owned by two individuals and was transferred to 
          one of those individuals upon the death of the other, with the 
          survivor obtaining sole ownership of that property.  
          Specifically,  this bill  :  

          1)Revises existing property tax law to provide that a transfer 
            of a co-tenancy interest in real property from one co-tenant 
            to the other that takes effect upon the death of the 
            transferor co-tenant does not constitute a "change in 
            ownership".

          2)Specifies that a transfer of a co-tenancy interest in real 
            property does not constitute a "change in ownership" only if 
            all of the following requirements are satisfied: 

             a)   The transfer is solely between and by two individuals 
               who, together, own 100% of the real property in a joint 
               tenancy or as tenants in common; 

             b)   The deceased co-tenant's interest in the real property 
               is transferred to the surviving co-tenant, thus, 
               terminating the co-tenancy; 

             c)   For one year immediately preceding the transfer, the 
               real property was co-owned by the co-tenants, and both 
               co-tenants have been the owners of record of that real 
               property;  

             d)   The real property constituted the principal residence of 
               both co-tenants immediately preceding the transferor 
               co-tenant's death;









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             e)   The co-tenants continuously resided at that residence 
               for the one-year period immediately preceding the transfer; 
               and,

             f)   The transferee has signed, under penalty of perjury, an 
               affidavit affirming that he/she continuously resided with 
               the transferor at the residence for the one-year period     
                   immediately preceding the transfer.

          3)Provides that a transfer of a co-tenancy interest in real 
            property takes effect upon the death of the transferor 
            co-tenant pursuant to the co-tenant's will or trust, through 
            intestate succession, or by operation of law.

          4)Applies to a transfer of real property interests only if the 
            transfer does not qualify for any other exclusion from a  
            property tax reassessment under Revenue and Taxation Code      
                   (R&TC), Chapter 2 of Part .5 of Division 1 (Sections 
            62-69.5).  

          5)Defines "co-tenancy interest" as an interest in real property 
            held only as tenants in common or joint tenants.

          6)Defines "principal residence" as a dwelling eligible for 
            either the homeowners' exemption or the disabled veterans' 
            exemption.  

          7)Provides that, notwithstanding other provisions of law, the 
            state is not required to reimburse, and will not reimburse, 
            local agencies for any property tax revenues lost by them 
            pursuant to this bill.

          8)Applies to transfers that occur on or after January 1, 2013

          9)Takes effect immediately as a tax levy.  

           EXISTING LAW:

           1)Provides that all property is taxable unless explicitly 
            exempted by the California Constitution or federal law.  
            Limits ad valorem taxes on real property to 1% of the full 
            cash value of that property as set forth in the California 
            Constitution.  "Full cash value" is defined as the assessor's 
            valuation of real property as shown on the 1975-76 tax bill 
            or, thereafter, the appraised value of that real property when 








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            purchased, newly constructed, or a change in ownership has 
            occurred. 

          2)Requires a reassessment of real property to current fair 
            market value upon a "change of ownership of that property," 
            which means that the value of the property, for property tax   
                     purposes, is redetermined based on current market 
            value.  The value of the property established for property tax 
            purposes initially, or redetermined where appropriate, is 
            referred to as "base year value", which is subject to annual 
            increases for inflation, not to exceed 2%.

          3)Defines the phrase "a change in ownership" as a transfer of a 
            present interest in real property, including the beneficial 
            use thereof, the value of which is substantially equal to the 
            value of the fee interest.  (R&TC Section 60). 

          4)Provides that a transfer of property due to death results in a 
            property tax reassessment, unless the transfer qualifies for 
            one of numerous exemptions available under existing law.  
            (California Constitution, Article XIIIA, Section 2; RT&C 
            Sections 60-69.5).  For example, a transfer of interests in 
            real property is exempted from reassessment if that transfer 
            is between spouses, domestic partners, parents and their 
            children (Proposition 58), grandparents and grandchildren 
            (Proposition 193, 1996) or between persons who own property in 
            a joint tenancy where the surviving joint tenant has the 
            "original transferor" status.  A property transferred under 
            these circumstances would retain its low Proposition 13 base 
            year value.  The Legislature's authority to create statutory 
            exemptions from property tax reassessment was affirmed by the 
            courts ÝSee, e.g., Strong v. Board of Equalization (2007) 155 
            Cal. App.4th 1182].

          5)Excludes from "change in ownership" the creation of a joint 
            tenancy or the transfer of joint tenancy interests if, after 
            the creation or transfer, the transferors are among the joint  
                  tenants.  In such a creation or transfer, the 
            transferors become the "original transferors" and any 
            subsequent transfer or termination of the joint tenancy 
            interest will not result in a change of ownership if the 
            interest vests entirely, or in part, in one or more of the 
            original transferors.  As long as a person who is "original 
            transferor" remains on the title, the property will not be 
            reassessed.  (R&TC Section 65).  The percentage of property 








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            subject to reassessment depends on whether the property is 
            held through joint tenancy or tenancy in common and whether 
            both individuals were added to the title upon property 
            acquisition or one was added at a subsequent date.  

           FISCAL EFFECT  :  The Board of Equalization (BOE) staff estimates 
          that this bill will result in a revenue loss of $108,000 
          annually.

           COMMENTS  :   

           1)The Author's Statement  .  The author states that, "AB 1700 
            protects surviving co-owners from the financial hardship of 
            property reassessment when a loved one passes away.  People 
            who live and own a home together and are unmarried, whether by 
            choice or because of the law, should be treated equally to 
            married couples."

           2)Arguments in Support  .  The proponents state that, as a result 
            of Proposition 13 and today's inflated real estate market, 
            property tax reassessments often have the practical impact of 
            forcing surviving owners to leave their homes.  Proponents 
            argue that this bill is consistent with the intent of 
            Proposition 13 in that it prevents financial hardship for the 
            surviving co-owner, regardless of whether the co-owners are 
            siblings, unregistered domestic partners or senior citizens 
            sharing the cost of housing.  Finally, proponents believe that 
            this bill would benefit many Californians, including same-sex 
            couples, seniors and families. 

           3)"Joint Tenancy" and "Tenancy in Common".   Joint Tenancy is a 
            way for two or more people to share ownership of real estate 
            or other property.  When two or more people own property as 
            joint tenants and one owner dies, the other owner 
            automatically become the owner of the deceased owner's share.  
            For example, if a parent and child own a house as joint 
            tenants and the parent dies, the child automatically becomes 
            the full owner of the house.  Because of this right of 
            survivorship, no will is required to transfer the property 
            because it goes directly to the surviving joint tenants, 
            without the delay and costs of probate.  

          Under current law, a transfer of property to the surviving joint 
            tenant that has "original transferor" status is exempt from 
            reassessment.   (R&TC Section 65).  In the case where the 








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            surviving joint tenant does not have that status, the 
            percentage of the property subject to reassessment to current 
            market value is 50%.  However, if the surviving joint tenant 
            had been added to the title of the principal residence after 
            the decedent had first acquired that property, and the 
            surviving joint tenant did not thereafter obtain "original 
            transferor" status, the whole property will be subject to 
            reassessment.  The 100% reassessment is authorized in this 
            case because the property was not reassessed initially when 
            the decedent added the survivor to the property's title as a 
            joint tenant.  

          As long as a person with "original transferor" status remains on 
            title, the property will not be reassessed.  Co-owners of real 
            property may become "original transferors" in the following 
            ways (Property Tax Rule 462.040): 

               i)     A and B take title to property as tenants in common, 
                 then transfer to A and B as joint tenants.

               ii)    A and B take title to property as joint tenants, 
                 then transfer their interests in the property to their 
                 revocable trusts for the benefit of each other, as joint 
                 tenants.  

               iii)   A transfers title to A and B as joints tenants, and 
                 A, but not B, becomes an "original transferor".  If, 
                 however, B transfers his interest in the property to his 
                 revocable trust for the benefit of A, then B becomes an 
                 "original transferor".

            Tenancy in common is a way for two or more people to own 
            property together where each can leave his/her interest upon 
            death to beneficiaries of his choosing instead of leaving it 
            to the other owners, as is required with joint tenancy.  

            Under current law, a transfer of interest between the decedent 
            and the survivor that had equal ownership interests in the 
            property would be subject to a 50% reassessment or, in the 
            case where the tenants did not own equal interests, the 
            reassessment would be equal to the amount of the decedents' 
            ownership interest in the property transferred to the 
            survivor. 

           4)Property Tax Rule 462.040  .  In 2003, the BOE promulgated rules 








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            that allow certain individuals who jointly hold title to a 
            home, i.e. seniors or registered domestic partners, to be 
            excluded from changes in ownership if one of the co-owners 
            dies.  However, according to Betty Yee, a Board Member, these 
            rules proved to be cumbersome and costly to implement.  AB 
            1700 would provide an alternative to the rule revision by 
            creating an exclusion for certain specified transfers of 
            property. 

           5)The Proposed Exclusion  .  The exclusion created by this bill 
            applies only to transfers of principal residences where the 
            transfer occurs as the result of the death of one of two 
            co-tenants.  The exclusion does not apply if two people shared 
            a principal residence but the survivor was not an owner of 
            record, i.e. his/her name was not on title to the property.  
            Furthermore, business entities are not eligible for this 
            exclusion, as it applies only to individuals. 

            Existing law already protects from property tax increase 
            transfers of real property between married people, registered 
            domestic partners, parents and their children, grandparents 
            and their grandchildren, and also joint tenants who are 
            "original transferors".  This bill creates an exclusion from 
            property tax reassessment for transfers of interests in 
            principal residences between  any  two people who live together, 
            including unmarried people, persons who are not domestic 
            registered partners, siblings, friends, companions, or just 
            roommates who share the cost of housing.  In all these cases, 
            the co-owners could avail themselves of the exclusion if the 
            transfer is due to death of one of the co-owners.  While 
            cognizant of the principals underlying Proposition 13 and the 
            tax policy behind this measure, Committee staff is concerned 
            about creating a precedent for exempting a transfer of real 
            property from property tax reassessments in the case of 
            co-tenants who are not family members. 

           6)Sunset Date  .  This bill lacks a sunset date to allow periodic 
            legislative review of the tax exclusion.  All prior bills 
            containing identical language included a 10-year sunset date.  
            The Committee staff recommends an amendment to add a similar 
            sunset date. 

           7)Proposed Technical Amendment  .

            On p. 2, strike out lines 8 to 12, inclusive, and insert:








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            (1)  The transfer is solely by and between two individuals who 
            together own 100% of the real property in joint tenancy or as 
            tenants in common.  

          8)Related Legislation  .  

          AB 2735 (De Leon), introduced in the 2009-10 Legislative 
            Session, was identical to this bill but included a 10-year 
            sunset provision.  AB 2735 was held under submission in the 
            Assembly Appropriations Committee.

          AB 103 (De Leon), introduced in the 2009-10 Legislative Session, 
            was identical to this bill but included a 10-year sunset 
            provision.  AB 103 was held under submission in the Assembly 
            Appropriations Committee. 

            SB 153 (Migden), introduced in the 2007-08 Legislative 
            Session, was identical to this bill but contained a 10-year 
            sunset provision.  SB 153 was vetoed by the Governor.  As 
            stated in the veto message: 

            "This bill would exempt real property from reassessment due to 
            change of ownership when one co-owner dies, leaving his or her 
            interest in the property to the surviving co-owner.

            "Existing law already provides that real property transferred 
            between spouses and registered domestic partners, or between 
            parents, grandparents, and children, is exempt from 
            reassessment.  Further, co-owners not covered by any of these 
            exemptions have the option of changing a real property title 
            to a joint tenancy, thus ensuring that a reassessment does not 
            occur upon the death of one joint tenant.  Given these 
            exemptions and options provided under existing law, this bill 
            is not necessary. 

            "For these reasons, I am returning this bill without my 
            signature."

            SB 565 (Migden), Chapter 416, Statutes of 2005, exempts from 
            reassessment to current fair market value a transfer of any 
            interest in real property between registered domestic 
            partners.

            AB 23 (Nation), introduced in the 2003-04 Legislative Session, 








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            proposed to clarify existing law related to the creation or 
            transfer of the joint tenancy interest and declared the 
            legislative intent to protect or carry out certain estate 
            planning objectives.  AB 23 died in the Senate Appropriations 
            Committee.

            SCA 5 (Speier), introduced in the 2003-04 Legislative Session, 
            authorized a county board of supervisors to adopt an ordinance 
            to exclude from the definition of a "change in ownership" or 
            "purchase" a transfer of an ownership interest in a principal 
            residence, located in that county, between co-owners who 
            resided together in that residence for the three years 
            immediately preceding the transfer.  SCA 5 was never heard in 
            committee. 

            SCA 9 (Speier), introduced in the 2002-03 Legislative Session, 
            similarly authorized a county board of supervisors to adopt an 
            ordinance to exclude from the definition of a "change in 
            ownership" or "purchase" a transfer of an ownership interest 
            in a principal residence, located in that county, between 
            co-owners of that residence if those parties co-owned and 
            resided in that residence for a period of three years 
            immediately preceding the transfer.  SCA 9 was held under 
            submission by the Assembly Appropriations Committee. 
              
          REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Equality California (Sponsor)
          Betty Yee, Board of Equalization (BOE) Chairwoman 
          Congress of California Seniors
          Assessor, County of San Luis Obispo
          Assessor, County of Santa Clara
          Assessor-Recorder, City and County of San Francisco
          California Communities United Institute
          California National Organization for Women
          California Apartment Association 
          California Association of Realtors

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916) 








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          319-2098