BILL ANALYSIS
AB 2735
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Date of Hearing: May 3, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2735 (De Leon) - As Introduced: February 19, 2010
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 cotenant 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 cotenant, 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
cotenants 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, 2011,
and before January 1, 2021.
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
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or, thereafter, the appraised value of that real property when
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. (RT&C 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, subject to a maximum increase of only 2% a year.
The Legislature's authority to create statutory exemptions
from property tax reassessment was affirmed by the courts
[See, 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
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transferor" remains on the title, the property will not be
reassessed. (R&TC Section 65). The percentage of property
subject to reassessment depends on whether the property is
held through joint tenancy or tenancy in common and or whether
both individuals were added to the title upon property
acquisition or one was added at a subsequent date.
FISCAL EFFECT : Board of Equalization (BOE) staff estimates that
this bill will result in an annual revenue loss equal to an
amount ranging from $175,000 to $525,000 with the amounts
increasing in subsequent years.
COMMENTS :
1)The Author's Statement . The author states that, "California
has a vested interest in keeping surviving co-owners in their
homes. One of the premises of Proposition 13 is to prevent
unexpected, sudden increases in property taxes for owners who
choose to stay in their homes. AB 103 builds upon this very
principle by protecting surviving co-owners from the financial
hardship of property reassessment when they are most
vulnerable - after 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 equality to married
couples."
2)Committee staff notes all of the following:
a) Joint tenancy is a way for two or more people to share
ownership of real estate or other property. When two or
more people owns property as joint tenants and one owner
dies, the other owner automatically own 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. (RT&C Section 65). In the case
where the surviving joint tenant does not have that status,
the percentage of the property subject to reassessment to
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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".
b) 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.
c) The exclusion created by this bill applies only to
transfers of principal residences where the transfer occurs
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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.
d) 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.
3)Related Legislation . Similar measures were introduced in
recent legislative sessions:
AB 103 (De Leon), introduced in the 2009-10 Legislative Session,
was identical to this bill. 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. 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
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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,
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
Betty Yee, Board of Equalization (BOE) Chairwoman
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Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098