A few months ago, I had a property owner call me and explain he had recently sold his property to a utility company under threat of eminent domain. He took the sale proceeds and invested the money in a comparable replacement property. When he applied to transfer his Proposition 13 base year value to the replacement property, the County assessor denied his request. The assessor explained that because the sale under threat of eminent domain was not to a public entity, it did not fall within the exception that allows for a transfer of the base year value.
I was a bit surprised by the assessor’s explanation, so I went to look it up. Sure enough, the regulation (Property Tax Law Guide section 462.500) provides that an owner is only entitled to transfer the Proposition 13 base year value if the owner is displaced (1) as a result of an eminent domain action or (2) under threat of eminent domain by a public entity. In other words, if a property owner faces condemnation by a non-public entity, the owner loses the ability to transfer the Proposition 13 base year value to a replacement property if the owner sells before the condemnation action is filed.
Based on the plain language of the statute, this likely is the correct analysis. And a new published decision, Duea v. County of San Diego, confirms this interpretation. But it doesn’t make it right. This language does not match the parallel income tax provision which allows for owners to accomplish a "1033 exchange" when selling as a result of eminent domain or under threat of eminent domain — regardless of the identity of the condemnor. And, such an interpretation simply doesn’t make sense, as it serves no legitimate purpose, and will only force unnecessary litigation with non-public entities just to avoid unfavorable tax treatment.
If you’re interested in a more detailed explanation of the rules, the Duea decision, and our thoughts on why a legislative fix is necessary, give our E-Alert, "The Unpreservation of the Base Year Value Transfer Under Threat of Eminent Domain," a read. And, if you ever have issues working through a Proposition 13 base year value transfer or a 1033 exchange to preserve your property tax basis or defer your income tax gains, feel free to give us a call. We’ll do our best to walk you through these hyper-technical rules.