BILL ANALYSIS Ó AB 1700 Page 1 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; AB 1700 Page 2 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 AB 1700 Page 3 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 AB 1700 Page 4 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 AB 1700 Page 5 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 AB 1700 Page 6 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: AB 1700 Page 7 (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, AB 1700 Page 8 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) AB 1700 Page 9 319-2098