California Property Tax Proposal Perspective
Commercial & Industrial Property Taxes Expected to Jump Under 2020 California Ballot Initiative
A 2020 California ballot initiative (#19-0008) would tax commercial and industrial properties on their fair market values – residential real property will not be affected. California’s state property tax rate of 1% will not change. The initiative is a partial rollback of Proposition 13 which limited annual property tax increases for more than 40 years.
The effective date for reassessment of most large businesses is the 2022 to 2023 fiscal year. The legislature is granted authority to phase in the effective date. Furthermore, the assessment is delayed for properties in which small businesses account for 50% or more of the space until the 2025 to 2026 lien date. The delay provides small business tenants additional time to assess leasing costs that may increase because of the initiative. The initiative includes several exceptions (noted below) which are designed to buffer the impact of the new tax. The new tax has a double impact to property owners in high-cost states like California because of the federal limit on the deductibility of state and local taxes.
The California initiative would exempt the following from tax:
- The first $500,000 of personal property for large businesses;
- 100% of a business's personal property when the business has 50 or fewer equivalent full-time employees;
- Property taxes for on-site businesses with single ownership and statewide holdings valued $3 million or less, and
- Agricultural properties.
State Revenue Generated
The sponsors of the initiative estimate a net increase in annual property tax revenues of $6.5 billion to $11.5 billion annually, depending on the strength of real estate markets. The revenue would be allocated to schools (40%) and local governments (60%).
November 2019 polling shows a slight edge to the proponents of the initiative. Proponents of the initiative continue to outraise opponents by a wide margin to finance their campaign.
Here are a few recommendations that may help you plan for the impact of this initiative if the passage seems likely:
- Determine whether your business fits the small business or agriculture exceptions.
- Assess the fair market value of your real and personal property in accordance with the effective dates in the initiative. With new construction including improvements, it is common to incur costs that may not be assessable. These types of costs could include expenditures that do not add value to the project such as demolition, excessive ground preparation costs, and change orders.
- Consider an independent property tax appraisal before the effective date. This information can help you challenge a large assessment. Appraisers will be in demand after passage.
- If you rent real property, initiate a discussion with your landlord regarding the potential impact on your lease costs before the earliest effective date for large businesses which is the 2022-2023 fiscal year.
Be sure to consult with your tax advisor regarding the application of these provisions for your tax situation. If you have any questions, please do not hesitate to contact your Boston Private representative of Northern or Southern California.
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