Ponzi

Retire in San Diego! Juuust kidding.

Why is this all important? Because these two specific loopholes have changed the tax burden in every county in California. Individuals who own their primary residence have, year after year, been paying a larger share of the property taxes received by the State of California, while at the same time the amount of property tax received has been declining as these commercial properties are not being reassessed. Within tax policy circles this actually has a name, it’s called a split-roll. And one of the key things that a split-roll does is shift the tax burden over time away from one side of the split and to the other side of the split. Commercial and industrial property have a free ride while residential homeowners are really the ones with the increasing tax burden. Now let’s look at two properties. The first is a single-family residence and the second is a four-story office building. Both properties were built prior to Prop 13. In the almost 35 years that Prop 13 has been in effect there have been no additional feet added to the four-story office building, and the LLC that has owned it, although having been sold three times, still owns the real estate. In all those years, the property has not be reassessed. The single-family residence on the other hand has been sold three times in that same time period, and at least two of the owners have made additions to the property. So that property has been through at least five reassessments. Now anyone can tell you that this is clearly “not fair.” And that’s the primary cause in the tax-burden shift that’s pushing a greater burden of property taxes from commercial property owners to those that own their homes. In simple terms it’s costing the State and the Counties billions of lost revenue, an at the same time rewarding those commercial property owners and punishing folks who live in their homes. Something tells me that was not what the people that voted for Prop 13 were intending to do to themselves. Now, let’s look at some other things that are happening at the same time. Since the income is going down for the State and the Counties because these commercial properties are not being reassessed the State and the Counties, in fact all of government, has had two choices. It’s either had to find creative ways to increase revenue, or find ways to cut what they spend. So parks that were generally free to access in the late 1970’s and 1980’s now have entrance fees. The fees for licenses and registrations have risen. The cost for attending college or university has risen. In other words, rather than sharing the pain for these items of common good there has been a shift of the burden to those that use these common services. And when the costs could not be covered by new fees for service, the services have been cut. A high school arts program here and a music program there, and suddenly California went from having the best public schools in the nation to being much further down the list. cont....
— August 28, 2015 9:26 a.m.

Retire in San Diego! Juuust kidding.

The idea was simple. All real estate would be taxed at a base year rate, and there was an annual limit on how much the tax could increase each year. This allowed people to properly plan and manage their real estate taxes and ended a process where people would be surprised by massive increases in property tax from reassessment. And all was good. But there was also a series of decisions that were made that would trigger a reassessment of real estate property. If a property was sold, then the sale would establish a new base rate for the property for future taxation. And if the property was altered (for instance more square footage was added to the property) this too could trigger a reassessment for the property. There are different types of real estate. There is the real estate of a single-family residence or the home or condo where one lives, and then there is the real estate that is income-producing. Income-producing real estate is generally commercial in nature. A hotel, a strip mall, a multi-family apartment complex, a warehouse, an office building, a restaurant. When was the last time that you saw someone add a 21st story to a 20 story office tower? Add another 20,000 square foot to an existing 50,000 square foot warehouse? Tear down the walls of an existing grocery store to add 15,000 square feet? On the other hand we all know one person who owns a home on a street where they or one of their neighbors made modifications to their home and triggered a reassessment of their real estate. So we have defined two separate classes of real estate. One will almost never be affected by reassessment and the other will. These two classes have something else in common. In most cases that single family home is in an individual’s name. And that commercial property? In most cases the ownership resides in a corporate entity. When a person sells his home, it’s generally sold as a transaction between two individuals (sometimes listed a a man and wife selling a real property to another man and wife, but in most cases between individuals.) But different story with those commercial properties. In fact a change of real ownership can occur, with the listed real property owner not changing. For example, Company A, LLC owns a 20-story office building and, instead of selling the real property, all the stock in Company A, LLC is sold from Corporation Z to Corporation X. So Company A, LLC stills effectively owns the real estate, as the real estate actually was sold or transferred from one owner to another. When there’s a change of ownership in that single family residence, that triggers a reassessment of the property’s valuation and taxation, but the change in ownership of the real estate between the two corporate entities through the change in ownership of the LLC does not. cont...
— August 28, 2015 9:24 a.m.

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