Forced Sale: A choice of Terms THINK IT THROUGH

Eminent domain and YOUR PROP 13 Tax Protection

The recent Supreme Court decision in Kelo v. City of New London has our local media outlets producing numerous writings related to the more provocative subject of potential eminent domain "land grab" abuses by our local governments. Unfortunately, scanning these very same outlets, I have yet to uncover any reporting on the issue of property taxation as it pertains to the affected "displaced" owners.

Overall, let me start by stating that I tend to take a middle ground stance on the "eminent domain" issue. I believe it would not be difficult to find instances of power abuses nor would it be difficult to discover examples where eminent domain has been a useful tool in economic development and rebirth. My intent with this letter is not to open the "public use v. public test" or the "fair market value v. just compensation" debate. I wish to focus my on the subject of "displaced" owner property taxation. I specifically wish to highlight displaced homeowners who need to purchase replacement properties and not speculators.

Let's take fictional Mr. A. and see what he faces regarding property taxes in a typical eminent domain type scenario. If he sells, basically, Mr. A can either forfeit his existing tax property base or keep it. If his existing tax base is higher, he might not be too concerned with losing it and so a slightly higher tax bill might be a non issue. However, if he has a lower tax base, losing it can mean many thousands per year in tax bill increases.

If Mr. A. purchased his home in San Bernardino County in 1995 for $75,000, under Proposition 13, assuming nothing has changed he would now be paying property taxes (in 2005) on a value of around $90,000. Let's say his mortgage payment and taxes are within his budget and normally he wouldn't be relocating. Let's also suppose that his property is now worth $500,000 as it is desirable for its potential sales tax base and land assemblage value under redevelopment. Along comes economic redevelopment.

Under the threat of eminent domain and the realization that he is going to be displaced no matter what, Mr. A. caves in and decides to sell and looks to find a replacement home. This is where the potential property tax liability issue comes into play. If he sells and takes the $500,000 value and purchases a replacement home he might qualify to transfer his "old" property tax value ($90k) to his new home under Proposition 13, but only if he transfers his property directly to the public entity or redevelopment agency forcing the eminent domain. Transferring to the developer doesn't count. If Mr. A. transfers his property directly to the developer who will be doing the redevelopment work on behalf of the public entity and not the public entity itself, under Section 68 and Property Tax Rule 462.5 of the Revenue and Taxation Code, he will be ineligible to keep his "old" rate of taxation. He will receive a minimum tax bill increase of around $4,100 ($500k-$90k X 1%) per year. An amount his budget, $342 per month, may not be willing to or able to absorb.

If Mr. A. doesn't qualify for Proposition 13 then he might turn to Proposition 60. Prop 60, Section 69.5 of the Revenue and Taxation Code, allows qualified home owners to transfer their tax base value on their principal residence to a replacement dwelling outside of eminent domain. But if Mr. A. isn't aged 55 or older, or severely and permanently disabled, he can forget about it because he won't qualify, thus triggering the same minimum $4,100 per year tax bill increase. Prop 60 is actually designed for "empty nesters" trading down and Prop 60 only works for the purchase of a home in the same county. If Mr. A. is 55 years or older and decides to live in a different county, under Proposition 90, the transfer of his tax base may or may not be available as it depends on which counties have reciprocal agreements amongst themselves.

With public agencies worried about doing everything they can to avoid the "negative press" they may encounter, they forcefully encourage property owners such as Mr. A, under the threat of eminent domain, to sell property directly to developers. In doing so, agencies get a good public relations front. Along these lines, they can say, "Mr. A received an acceptable price because he sold directly to the developer and we avoided the eminent domain process and used no taxpayer money to facilitate this project." They also sidestep the political "hot potato" of using government power and government money to buy private property for developers in order to facilitate the building of shopping and retail type centers.

But on the flip side, feeling pressured from the local agency looking to increase sales tax and revenue streams, Mr. A. is caught in the middle of the eminent domain tug of war and sells. In doing so, Mr. A. and others like him can make sale transfer choices under duress with potentially disastrous results in the form of significantly higher rates of taxation. Losing a low property tax base certainly qualifies in my book.

With Highland set to embark on a town center and their own version of mixed use residential developments, the possibility of forcing homeowners into higher tax bills will no doubt become increasingly more probable. I urge the city of Highland leaders and those homeowners who might be affected by the future process of "economic development," to do everything in their ability to make sure that apparent subtle nuances in eminent domain as they pertain to property taxation rule and law, do not become expensive realities for those unfortunate enough not to have the ability, knowledge, or resources to fully investigate the process.

I have encountered numerous individuals who have made this unfortunate mistake and I write this letter with the hopes and expectations that others will not follow suit. Propositions 13, 60, and 90 all have additional qualifying requirements and I urge all interested parties to investigate these Propositions for themselves.

Letter in the City of Highlands paper