Recent changes in how real estate and real estate transfers are taxed in some California communities could have a significant impact on your estate plan.
A hefty surcharge for possession of certain types of vacant properties, as well as an increased tax on real estate transactions, may require changes to the timing and method for gifting or otherwise transferring property owned in those cities.
Last November, Oakland residents passed Measure W, a city ordinance that authorizes a parcel tax on vacant land and buildings. Generally, the following will be assessed between $3,000 to $6,000 annually:
- Vacant lots in use less than 50 days per calendar year (up to $6,000 per parcel).
- Condominiums in use less than 50 days per calendar year (up to $3,000 per property).
- Properties that permit ground-floor commercial activity, but are vacant (up to $3,000 a parcel).
The council is required to pass legislation that establishes a procedure for identifying vacant properties. Affected property owners will then be required to self-register.
The following are exempted from the parcel tax:
- Properties used for a farmer’s market or other weekly events.
- Very low-income property owners.
- Property owners for whom the tax would constitute a financial hardship.
- Property owners unable to develop their parcel due to non-financial hardships.
- Property owners unable to develop their parcel because of exceptional circumstances, such as damage from a national disaster.
- Low-income owners who are senior citizens.
- Disabled property owners.
- Non-profit organizations.
- Public agencies.
Also exempt from the parcel tax are property owners who have submitted a project for planning approvals or have a project under construction. Owners who have received entitlement approvals, but need more time to complete their project, may apply for a two-year exemption from the tax. In addition, the city finance director is authorized to establish other exemptions as needed.
Measure W is expected to generate between $6.5 to $10.5 million. Eighty-five percent of the revenue raised will be dedicated to services for the homeless and those at risk of becoming homeless, creating affordable housing, curbing illegal dumping, and cleaning up blighted properties. Among the homeless services authorized by the ordinance are job training, housing assistance, sanitation and cleaning services for homeless encampments, navigation centers, and displacement prevention.
A Commission on Homelessness will be established to provide oversight of the implementation of Measure W. However, the tax will expire after 20 years or in 2039.
Oakland’s attempts to deal with its homeless problem, illegal dumping, and blight are being carefully watched by other cities in California, including San Francisco. More than a quarter of the nation’s homeless reside in California, a problem exacerbated by rental prices that average 2.5 times the national average.
While many believe Measure W will be difficult to implement, most consider it a positive and creative approach to addressing California’s unique urban problems.
Oakland also voted to change the way real estate sales are taxed. Transactions valued at between $2 and $5 million will be taxed at 1.75 percent. Sales exceeding $5 million will be taxed at 2.5 percent. The revenue generated from this tax increase will also be used to address homeless issues.
El Cerrito has implemented a new real estate transfer tax. Real estate transactions will be taxed a $12 per every $1,000 of the final sales price, with the tax payable by either the buyer or seller. The tax is expected to generate approximately $2.7 million for the El Cerrito government’s general fund.
At this point, it is important for individuals to examine their real estate portfolios and determine whether any properties will immediately be impacted by these changes. However, because it is likely that more communities will embrace the same revenue raising tactics in the near future, it may also be necessary to revise timelines and strategies for property sales and transfers in general.
The goal of an estate plan is tax efficiency. That’s why it’s important to regularly review your plan and address changes in the law that may have a negative impact.