It seems that San Francisco may have just partially removed its exception from transfer tax that applied to gifts, but the Office of the Assessor-Recorder may not be aware. As a bit of background, transfer tax applies to transfers of interests in real property and, in some cases, to transfers of interests in legal entities that own real property. Transfer tax applies to transfers of interests in a legal entity when enough of the interests in the entity are transferred so as to result in a deemed “change of ownership” of the real property that it owns.
This past November, San Francisco voters approved Proposition W, a ballot measure that increased real property transfer tax rates and made certain other changes to the language of the San Francisco transfer tax ordinance. One of the changes provides that any time there is a transfer of interests in a legal entity that results in a deemed “change of ownership” of the real property that the legal entity owns, the real property will be treated as if it were sold for its full fair market value. Consequently, transfer tax will be applied to the full fair market value of the property, regardless of any amount paid for the interests in the legal entity.
The problem with this change for persons who wish to make gifts of interests in legal entities is that such gifts can result in a “change of ownership” of the real property that the entity owns. By causing every “change of ownership” to give rise to a deemed sale of the real property, it appears that gifts of interests in legal entities that result in a “change of ownership” will now trigger transfer tax on the full fair market value of the real property that the legal entity holds. Notably, this could be the result even if the gift were made to a charitable organization.
This is a departure from the previous rule. The California Revenue and Taxation Code provides an exception from transfer tax for gifts. As a charter city, San Francisco is permitted to override this rule with its own legislation, but had not done so before approving Proposition W. Before Proposition W, both the transfer tax affidavit that must be filed upon a transfer of interests in a legal entity that owns real property and the frequently asked questions portion of the Office of the Assessor-Recorder’s website explained that no transfer tax was due when a gift was made. However, the change to San Francisco’s Real Property Transfer Tax Ordinance contained in Proposition W appears to now override the exception for gifts in the California Revenue and Taxation Code. It does so by providing that deemed changes of ownership, which can arise when gifts are made, now result in deemed sales of real property held by legal entities (regarding which there has been a “change of ownership”).
Thankfully for taxpayers, it appears the Office of the Assessor Recorder either disagrees with this interpretation of Proposition W’s language or is simply unaware of its impact. The Assessor-Recorder’s transfer tax affidavit, which was revised after the election, and FAQ section on its website still provide that gifts are not subject to transfer tax. However, the Assessor-Recorder’s position could change or the City Attorney’s Office could take a contrary position. As a result, caution is in order.
Finally, it should be noted that Proposition W only affects transfers of interests in legal entities. Gifts of direct interests in real property should remain exempt from transfer tax.