2015 Update: Transfer Taxes in California

• Publication year: 2015
• Author: Dena M. Cruz

2015 Update: Transfer Taxes in California

Dena M. Cruz

Dena M. Cruz is counsel at Bryan Cave, LLP and a former member of the Executive Committee of the Real Property Section of the State Bar of California. The author would like to thank and acknowledge Scott Rogers of Rutan & Tucker for his work on an earlier transfer tax article published by the Journal in 2005.

I. Introduction

California, like nearly all states, requires the payment of a tax on most instruments transferring an interest in real property. The amount of the tax, and the rules and practices regarding such taxes, vary greatly across the state. As a consequence, a clear understanding of the California transfer tax framework is required to avoid unnecessary confusion, delay, and expense in closing California real property transactions. This article will outline the transfer tax system in California, provide a summary of the major exemptions to the tax, and discuss certain common practices relating to the California Documentary Transfer Tax Act.

II. Historical Context

To make sense of the seemingly irrational treatment of transfer taxes in California, practitioners need to appreciate the political history of how transfer taxes were authorized, expanded, and limited in California, as well as several recent decisions in California regarding transfers of interests in entities that own real estate and recent legislation requiring the transfer tax declaration to be placed on all recorded documents. This section will focus on Former Title 26 United States Code section 4361 (the "Federal Stamp Tax Act"), California Revenue & Taxation Code ("Cal. Rev. & Tax. Code") sections 11901 through 11934, commonly known as the "Documentary Transfer Tax Act" (the "Transfer Tax Act"), and statutes and cases authorizing charter cities and counties to adopt their own transfer tax acts.

A. Federal Stamp Tax Act

Prior to 1968, federal law imposed documentary stamp tax on, among other things, conveyances of real property and transfers of capital stock.¹ The Federal Stamp Tax Act imposed a separate tax on "each deed, instrument, or writing by which any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers."² Additionally, Former Title 26 United States Code section 4321 imposed a tax on the "sale or transfer of shares or certificates of stock," which included "shares or certificates of profits or of interests in property or accumulations."

With respect to transfers of real property, the Federal Stamp Tax Act defined "realty" as including:

(a) those interests in real property which endure for a period of time, the termination of which is not fixed or ascertained by a specific number of years, such as an estate in fee simple, life estate, perpetual easement, etc., and (b) those interests enduring for a fixed period of time, but which, either by reason of the length of the term or the grant of a right to extend the term by renewal or otherwise, consist of a bundle of rights approximating those of the class of interests mentioned in (a), above.³

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Unlike California's Transfer Tax Act, the Federal Stamp Tax Act defined "sold" as importing "a valuable consideration, which may involve money or anything of value."⁴ Additionally, the Federal Stamp Tax Act defined the term "deed" as including "any instrument or writing whereby realty is assigned, transferred, or otherwise conveyed to, or vested in, the purchaser, or at his direction, any other person."

Former Title 26 United States Code section 47.4361-2(a) set forth transfers and conveyances subject to the stamp tax, including, but not limited to, conveyances of realty in exchange for other property,⁵ a conveyance by a defaulting mortgagor to the mortgagee in consideration for the cancellation of the mortgage debt,⁶ a conveyance of realty to a corporation in exchange for shares of its capital stock,⁷ a conveyance of realty by a corporation in liquidation or in dissolution to its shareholders subject to the debts of the corporation,⁸ and a conveyance of realty by a partner to the partnership as a contribution of partnership assets.⁹ Former Title 26 United States Code section 47.4361-2(b) set forth transfers and conveyances not subject to the stamp tax, including but not limited to, the reconveyance of realty collateral upon payment of the debt,¹⁰ the conveyance of realty without consideration and otherwise than in in connection with a sale,¹¹ the transfer to confirm title already vested in a grantee,¹² and the transfer of real estate in a statutory merger or consolidation from a constituent corporation to the continuing or new corporation.¹³

The Federal Stamp Tax Act was repealed by the Excise Tax Reduction Act of 1965.¹⁴ The repeal of the stamp tax on transfers of capital stock became effective on January 1, 1966. The repeal of the stamp tax on the sale of realty became effective on January 1, 1968.

B. Transfer Tax Act

In 1967, the California Legislature enacted the Transfer Tax Act¹⁵ to replace the Federal Stamp Tax Act on conveyances. The California Legislature modelled the Transfer Tax Act after the portion of the Federal Stamp Tax Act applying to conveyances of stock and realty.¹⁶ Cal. Rev. and Tax. Code Section 11911, which is patterned after former 26 United States Code section 4361, allows the board of supervisors of any county, or city and county, and the legislative body of any city within a county that has enacted a tax under section 11911, to impose a tax on each deed, instrument, or writing by which any lands, tenements, or other realty sold within the county shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers. Section 11911 authorizes counties to impose a tax of $0.55 per $500 or fractional part thereof (commonly referred to as being $1.10 per $1,000) based upon the consideration or value of the property transferred (exclusive of the amount of any lien or encumbrance remaining on the property at the time of the transfer).¹⁷ Section 11911 also authorizes cities to impose a similar tax at a rate equal to one-half the rate imposed by the county in which the city is located.¹⁸ All counties in California, and virtually all cities, quickly responded to Section 11911 by enacting their own transfer tax ordinances. Of note, though unlikely to occur, the Transfer Tax Act contains a provision that should the Congress of the United States impose a tax on transfers of real property after July 1, 1968—the effective date of the Transfer Tax Act—the Transfer Tax Act will have no operative effect on and after the first day of the fiscal year that follows the date on which Congress imposed such a federal tax.¹⁹

Sections 11921 through 11930 of the Transfer Tax Act list certain exemptions to the transfer tax, many of which are similar to the Federal Stamp Tax Act exemptions that applied to transfers of real property and transfers of stocks. For instance, the Transfer Tax Act includes exemptions: (1) to secure a debt;²⁰ (2) for certain types of reorganizations;²¹ (3) for orders of the Securities & Exchange Commission;²² (4) for certain partnership transfers;²³ (5) for gift transfers;²⁴ and (6) transfers by reason of death.²⁵

C. The Home Rule: Charter County and City Transfer Tax Acts

In California, counties and cities are divided into "general law counties," "general law cities," "charter counties," and "charter cities."²⁶ Article XI, section 7, of the California Constitution provides that "a county or city may make and enforce within its limits all local, police, sanitary[,] and other ordinances and regulations not in conflict with general laws." This is commonly referred to as the "Home Rule." Two key cases to look at with respect to Home Rule issues are Ex parte Braun²⁷ and California Fed. Savings & Loan Assn. v. City of Los Angeles ("Cal Fed.").²⁸

In the 1903 case of Ex parte Braun, the City of Los Angeles passed an ordinance providing for the licensing and regulating of wholesale liquor dealers. The ordinance also imposed a tax of sixty dollars per month on every wholesale liquor dealer selling, serving, or giving away quantities of alcohol. The detainee, in a writ of habeas corpus, argued that California Political Code section 3366 abrogated the power of the city to issue licenses for revenue purposes and limited the licensing powers to matters of regulation only. The California Supreme Court, in upholding the lower court decision, held that "the collection of a license-tax for revenue purposes is a well-recognized exercise of the taxing power." Citing U.S. Supreme Court Justice Field in United States v. New Orleans,²⁹ the state high court further held that "[a] municipality without the power of taxation would be a body without life, incapable of acting, and serving no useful purpose.... When the power to impose taxes is conferred upon a municipality to enable it to raise the money essential for the purposes for which it is created, that power necessarily becomes a municipal affair."³⁰

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Consistent with section 11911 and the powers granted to charter cities and counties, numerous charter counties and cities adopted transfer tax acts that are significantly different than the Transfer Tax Act. Importantly, there is a vast range of transfer tax rates, with rates as low as $1.10 per $1,000 (for example, Cloverdale, Windsor, and Woodland), and as high as $15.00 per $1,000 (Berkeley and Oakland). Moreover, numerous charter cities and counties adopted additional exemptions (for example, San Francisco³¹ and Oakland³² adopted an exemption for transfers between domestic partners), and chose to drop exemptions or refused to amend to include exemptions contained in the Transfer Tax Act (for example, Berkeley³³ and Los Angeles³⁴ have no "Proportional Interest" exemption and Albany³⁵ places limits on the "gift" exemption). Lastly, some charter cities elected to impose the tax based on the full value...