The Issues With The California Prop 13 Split Roll Proposal

A proposition on the November 2020 ballot in California could become a serious problem for people who own commercial property. If it passes, property taxes on commercial buildings could rise significantly due to the removal or adjustment of Proposition 13. This comes on the heels of the state holding many different “property tax modernization forums” across the state, to hopefully gather input from leading experts in changing the system and the prop 13 split roll idea is one of them. If this measure goes into effect, it would mean hardship for a lot of property owners in the state. Right now, this proposition protects the way a building can be taxed, and how much that tax can rise each year. But if it goes away, properties will be reassessed at their current value — which is often significantly higher than when the person or company first bought the property.

See related: The City of Los Angeles proposes a “parcel tax” on a $/square foot basis on commercial owners

Say you bought something in 1980, and you paid $700,000 for it. Only a two percent increase in value is allowed each year, so now your property is worth $1.5 million — at least for property tax purposes. That puts you paying around $15,000 a year in tax. If the proposition disappears and you lose your protection, though, your property will be reassessed at the current market value. That’s likely somewhere around $4.5 million, which means you’ll suddenly be paying an extra $30,000 per year in property taxes. The Prop 13 split roll idea is one that’s making a lot of commercial property owners very nervous, all throughout the state.

There are concerns from the state over how much revenue they are missing out on by not taxing properties at their fair market value. If the prop 13 split roll goes into effect and the taxation system changes, commercial property owners will have a reassessment every three years and will be taxed on the current market value at that time. But there are some companies that won’t see as much of a change. If you own and occupy your commercial property and the assessed value is under $2 million, you’re exempt. Companies with under 50 workers can also see exemptions for fixtures, machinery, and equipment.

Reading the proposition and seeking advice from real estate and tax professionals would be a good idea for anyone who owns commercial property in California. It’s better to understand how the changes could impact your business before those changes happen, instead of waiting until they occur and being caught by surprise.