Real Estate: San Francisco Voters Defeat New Transfer Tax on Real Estate But Other Real Estate Transfer Taxes in California Abound
This month the voters of the City and County of San Francisco narrowly rejected Proposition G which would have allowed San Francisco to impose an additional transfer tax (ranging from 14%-24% of the total sale price) on certain multi-unit residential properties within San Francisco that were sold within five years of acquisition. This proposed tax, although rejected by the voters, is part of a pattern by some California cities and counties to seek additional revenues from transfer taxes associated with real estate transactions and/or entities that own real estate.
The City and County of San Francisco, and Counties of San Diego and Los Angeles (among others) will assess documentary transfer taxes on an entity such as a corporation, partnership or limited liability company when there has been a greater than 50% change in ownership of the entity, on a cumulative basis. Such change in ownership would otherwise cause a property tax reassessment of the real estate owned by the entity. Certain counties also apply documentary transfer taxes when there is a change in ownership in a single member limited company. The limited court cases involving these transfer tax matters have not been favorable to taxpayers. Furthermore, certain counties are beefing-up the paperwork taxpayers must submit with regard to real estate transactions. Along these lines, effective January 1, 2015, all recorded documents involving the transfer of real property in the State of California must provide a disclosure of the amount of documentary transfer tax paid. Off record documentary transfer tax declarations will no longer be permitted.
While the Documentary Transfer Tax Act imposes a tax rate of a mere 0.11% of value, many of California’s cities are imposing transfer taxes with significantly higher rates. (San Francisco already has the top rate at 2.50% for values exceeding $10,000,000.) Inadvertently triggering liability for transfer tax in corporate transactions could have material impact on the parties to that transaction. However, transfer tax statutes and ordinances universally include a list of transfers that are exempt from the tax. While charter cities in California have flexibility to structure their transfer taxes, and many have unique exemptions in their ordinances and/or lack certain of the exemptions that exist under the Documentary Transfer Tax Act, there are often alternatives in structuring transactions that could result in a substantial reduction of tax liability. Early consideration should be made regarding whether statutory exemptions apply, or may be brought to apply, to a transaction through alternative structuring.
The application of these and other transfer taxes varies by county and in some cases by city. Please contact Stanley E. Heyman, Esq. or Douglas F. Landrum, Esq. to further discuss the broadening impact of California city and county transfer taxes to your real estate transactions or entities that own real estate, and whether alternative transaction structures may be available to reduce a transfer tax burden.