Nonprofit medical facilities and California real estate transfer taxes

Owners of nonprofit health care facilities in California should be careful not to assume that because their organization is exempt from regular property tax assessments, they need not pay real estate transfer taxes when the real property is purchased or sold.

Even though a nonprofit health care facility may qualify for California’s “welfare” exemption for property tax assessment purposes, the nonprofit corporation owner may still be subject to a real property transfer tax at the time real property is transferred.  This tax can be a significant sum and can be negotiated as part of the transaction. 

California law authorizes each county and some cities to impose a transfer tax in connection with the transfer of real property within the state.   

Counties may impose a tax on instruments transferring real property at a rate of 55 cents for each $500 of the value of the property.  (California Revenue and Taxation Code section 11911(a).) 

As for cities, the applicability of the transfer tax depends on whether the city is a “general law” city or a “charter city.”  If the city is “general law,” the city may not impose a transfer tax on the sale of real property.  (California Government Code section 53725, enacted as Proposition 62 on November 4, 1986).  If the City is a “charter city,” the city may impose a transfer tax.  (Fielder v. City of Los Angeles (1993) 14 Cal.App.4th 137.)  The tax is applicable to “realty sold,” but California courts have construed that phrase to include a “change in ownership” too, not just a conveyance of title. 

Transfer taxes vary among charter cities and can be substantial.  For example, as of this writing, the transfer tax rate in the City of Oakland is $15.00 per $1,000 of property value and the transfer tax rate in the City of San Diego is $1.10 per $1,000 of property value.  Therefore, in a $50,000,000 medical office building sale, transfer taxes can be $750,000 in Oakland or $55,000 in San Diego.  (Note: Due to the budgetary challenges currently faced by many cities, there is growing pressure to increase transfer tax rates, especially in those charter cities where the transfer tax rate is low.)

During the negotiation of a purchase and sale agreement, buyers and sellers will often discuss who will be responsible for the payment of transfer taxes.  Nonprofits should not assume that they are exempt from the payment of the tax because they otherwise may qualify for an exemption from the payment of ordinary “property taxes.”  Nonprofits should also be careful not to fall automatically into the trap of the county “custom” in the payment of transfer taxes.  Allocating the responsibility for payment of transfer taxes is fully negotiable in the purchase and sale agreement. 

There is a short list of exemptions to the application of the transfer tax.  While none of the exemptions are similar to the broader “welfare” exemption available to nonprofits for regular property taxes, counsel should be consulted to determine whether any of those exemptions might apply in your given situation.