Californians who have owned their properties for years understand the benefits of Proposition 13: their property taxes are based upon the property's purchase price (with only small allowable annual increases), as opposed to the property's current value. But upon a transfer, the property gets reassessed at its current value. Consequently, people in California often wind up with higher property taxes when they sell one property and buy another, even if the new property costs exactly what they received for the sale of the old property.
When an owner is forced to "sell" as a result of the government's power of eminent domain, this rule does not apply. Rather, California law contains an exception which allows condemned owners to keep their Proposition 13 base year value and transfer it to a replacement property. However, there are limitations.
For example, California Revenue and Taxation Code section 68 provides that the property owner must file a request for the transfer of the base year value within four years after the recordation of a final order of condemnation. So what happens if the property owner fails to file for the transfer within the four year time limit? This question was recently answered by the Court of Appeal in Olive Lane Industrial Park v. County of San Diego (2014 Cal. App. LEXIS 632).
In Olive Lane, a property owner had its property condemned by Caltrans and was awarded just compensation of $2 million. The owner had a base year tax value in the condemned property of $650,000. The owner then purchased another property within the four year time limit, but failed to file its application to transfer the base year value for five and one-half years. The County of San Diego denied the owner's application as untimely, and the trial court agreed.
On appeal, the Court held that the Legislature has the right to impose reasonable limitations on the exercise of constitutional rights, and therefore it can impose time restrictions on a property owner's ability to transfer their base year tax value of property taken by eminent domain. However, in interpreting the legislation, the Court held that while the four year time limit applies to a property's owner seeking a retroactive application of the base year value transfer, it is silent as to an owner's application to transfer the base year value going forward in future years. In other words, the legislation allows the
"application of the eminent domain replacement property exclusion in a prospective manner when a taxpayer acquires the property within the four-year period but misses the four-year filing deadline."
The Court explained that its holding was "a narrow one, premised on the just compensation eminent domain principles . . . ."
The case serves as an important reminder for property owners seeking to acquire replacement property after their property is acquired by eminent domain: the replacement property must be acquired within four years of the recordation of the final order of condemnation if the owner seeks to transfer its base year tax value. If the owner wants the base year value applied retroactively, the application must be filed within four years as well. However, according to Olive Lane, the owner will not lose the right to transfer the base year value prospectively if it misses the four year filing window.