​Real Estate:

You need to know about the split role tax proposal

June 2019

By Al Ricci

You will be voting on a split role tax initiative on the 2020 ballot. What does that mean to you?

In 1978, California voters approved Prop 13, which limited tax increases on real property to a maximum of two percent per year, unless the property was transferred, at which point it would step up to market value. The basic tax rate in Orange County is one percent of the property value. This allows property owners to have a stable and predictable forecast on their future property tax bill.

A split role property tax would tax properties differently, depending upon their use. There is a misconception that commercial property owners’ and homeowners’ tax rates should not be created equal. Currently, they are taxed at the one percent basic rate with increases up to two percent over the years of ownership. The split role proposal would tax commercial properties at current market value and at their highest and best use. 

This can be best explained with an example:  An antique store in Old Towne Orange that has had the same owner since 1977 pays about $1,601 in property taxes. Under the proposed split role tax plan, the property would be assessed at highest and best use at market value. That use would undoubtedly be a restaurant, resulting in new taxes of $30,150.  Unbelievable?  You bet. 

So in a triple net lease agreement, the new taxes would be passed on to the tenant, which would either put them out of business or at least force the business operator to pass some or all of the increased costs to the consumer.  In the end, the split role tax plan would be bad for the state and local California economy. Major corporations that may want to relocate or remain in California may decide to move out of state. 

Do we see a pattern here?  The split role tax proposal could result in a $10 billion tax increase, which will result in higher prices to the consumer and thousands of jobs lost.  Say goodbye to the 3/$1.29 taco night that used to be 3/$.99, or the real estate developer who may want to build homes, but would be forced to build the highest and best use -- another shopping center.  This proposal will certainly deter residential development, unless the program would allow the highest and best use as multi-family homes taxed at a higher rate!

Proposition 13 is one of the few fair tax programs that encourages home ownership, helps seniors and new homeowners in California. The same fair treatment for commercial property owners will ultimately make it easier to do business in our state and keep prices down. As the president of the Orange Chamber of Commerce and a realtor, I urge you to go to www.octax.org to learn more about this proposal and how it will impact our state and local economy.