California Documentary Transfer Taxes

California’s Documentary Transfer Tax Act allows counties and cities to collect tax on documents that transfer real estate. The Documentary Transfer Tax Act is broadly worded, imposing 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, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale) exceeds one hundred dollars …

This language covers almost every interest in property that can be created or transferred under California law. It includes:

• Outright property transfers;
• Tenancy in common interest;
• Joint tenancy interests;
• Community property interests;
• Life estates and remainder interests;
• Long-term leases;
• Non-temporary easements;
• Mobile homes installed on permanent foundations.

A transfer of any of these interests is subject to documentary transfer taxes. The documentary transfer tax is due even if the instrument is not recorded in the county real estate records. The creation and delivery of the deed causes the documentary transfer tax to become due.

How to Determine the Amount of the California Documentary Transfer Tax

Before calculating the amount of the California documentary transfer tax, it is important to determine whether the transaction is subject to the tax. As discussed below, there are many exemptions to the documentary transfer tax. If any of these exemptions apply, no documentary transfer taxes will be owed.

If the transfer is not exempt, determining the documentary transfer tax can be tricky due to the interplay between county and state taxes. The California Documentary Transfer Tax Act allows counties to impose taxes at a rate of 55 cents per $500 of property value or consideration paid. This amount—which is often calculated as $1.10 per $1,000 of property value or consideration paid—is reduced by any outstanding mortgage or other encumbrance on the property when it is transferred.

In addition to the county rate, cities may impose additional documentary transfer taxes. The amount that the city may impose depends on whether the city is a charter city or a general law city. A charter city is a city in which the governing system is defined by the city’s own charter instead of by California law. Charter cities have supreme authority over their municipal affairs and have broad leeway to impose their own tax rates.

Many of California’s 121 charter cities have enacted their own tax rates. In Berkeley, for example, the city documentary transfer tax rate is $15.00 for each $1,000 of property value—significantly higher than the county’s rate of $1.10 per $1,000 of property value. When a charter city imposes its own tax rate in excess of the county’s tax rate, the county does not provide a credit for the city tax. This means that the county and city property taxes in charter cities are often cumulative. In Berkeley, property owners pay a total of $16.10 ($1.10 county rate plus $15.00 city rate) on each $1,000.00 of property value transferred.

Cities that are not charter cities are known as general law cities. General law cities may impose a transfer tax equal to one-half of the rate imposed by the county. When the city imposes a tax, the county transfer tax is reduced by the amount of the city’s transfer tax so that the amount that the taxpayer pays remains at 55 cents per $500 of property value or consideration.

Common Exemptions from California Documentary Transfer Tax

There are several exemptions that are often used to avoid application of the California documentary transfer tax. These exemptions include writings to secure a debt, transfers to or from governmental entities, transfers incident to reorganizations or adjustments, transfers of interests in entities taxed as partnership, transfers that reflect mere changes in the method of ownership, transfers pursuant to divorce or separation, and transfers by gift or death.

Instruments in Writing to Secure Debt

Section 11921 of the California Revenue and Tax Code provides an exemption for “any instrument in writing given to secure a debt.” This exemption applies to mortgages, deeds of trust, reverse mortgages, and even installment sale contracts. It does not apply, however, to sale-leasebacks, synthetic leases, and other debt-like transactions that require a deed from the property owner to the lender.

Transfers to or From Governmental Entities

Section 11922 of the California Revenue and Tax Code provides:

Any deed, instrument or writing to which the United States or any agency or instrumentality thereof, any state or territory, or political subdivision thereof, is a party shall be exempt from [The California documentary transfer tax] when the exempt agency is acquiring title.

This provision has been interpreted liberally to include transfers to cities, county water districts, and public retirement systems. It is often used when a federal agency—like the Veterans’ Administration or U.S. Department of Agriculture—underwrites a mortgage and eventually forecloses. In that scenario, the deed to and from the federal agency is exempt from documentary transfer tax.

Transfers Incident to Reorganization or Adjustment

Section 11923 of the California Revenue and Tax Code provides an exemption from documentary transfer taxes for transfers made to give effect to a plan of reorganization that is:

• Confirmed under the Federal Bankruptcy Act;
• Approved in an equity receivership proceeding in a court involving a railroad corporation;
• Approved in an equity receivership proceeding in a court involving a corporation; or
• Whereby a mere change in identity, form, or place of organization is effected.

These exceptions only apply if the transfer documents are made, delivered, or filed within five years from the date of the confirmation, approval, or change.

Transfers of Interests in a Entity Taxed as a Partnership

Section 11925(a) and (b) of the California Revenue and Tax Code applies to “any realty held by a partnership or other entity treated as a partnership for federal income tax purposes.” Transfers to entities taxed as partnerships are exempt from documentary transfer tax if:

• The partnership or other entity treated as a partnership is considered a continuing partnership (i.e., if the partnership is not terminated) for federal tax purposes; and
• The entity continues to hold the real estate after the transfer.

If the partnership is treated as terminating for federal tax purposes, all real estate owned by the entity is treated as having been conveyed from the terminating entity to the new entity at the property’s then-current fair market value, causing the documentary transfer tax to become due.

Transfers that Reflect Mere Changes in Method of Holding Title

Section 11925(d) of the California Revenue and Tax Code provides:

No levy shall be imposed pursuant to this part by reason of any transfer between an individual or individuals and a legal entity or between legal entities that results solely in a change in the method of holding title to the realty and in which proportional ownership interests in the realty, whether represented by stock, membership interest, partnership interest, cotenancy interest, or otherwise, directly or indirectly, remain the same immediately after the transfer.

This broad exemption covers many common transfers, including transfers to and from living trusts and transfers to businesses in situations where the transferors will own an interest in the business that is proportionate to their prior ownership of the real estate.

Transfers Pursuant to or In Lieu of Foreclosure

Under Section 11926 of the California Revenue and Tax Code, a deed from a borrower to a lender as part of or in lieu of foreclosure is exempt from documentary transfer tax, but only if the consideration paid to the borrower does not exceed the unpaid debt on the property, inclusive of interest and costs. If the amount paid in a foreclosure sale is more than the amount that the borrower owes to the lender, the excess is subject to the documentary transfer tax.

To qualify for the exemption, the deed transferring the property must describe the consideration and amount of unpaid debt and identify the grantee as the borrower.

Transfers Pursuant to Divorce or Separation

Section 11927 of the California Revenue and Tax Code applies to transfers that divide marital property pursuant to a legal separation or divorce decree, judgment of nullity or other judgment under the California Family Code, or by a written settlement agreement between the spouses executed in contemplation of separation or divorce. To qualify for the exemption, the deed or other writing must include a written recital, signed by either spouse, stating that the deed or other writing is entitled to the exemption.

Transfers by Gift or Death

Section 11930 of the California Revenue and Tax Code provides:

[The California documentary transfer tax] shall not apply to any deed, instrument, or other writing which purports to grant, assign, transfer, convey, divide, allocate, or vest lands, tenements, or realty, or any interest therein, if by reason of such inter vivos gift or by reason of the death of any person, such lands, tenements, realty, or interests therein are transferred outright to, or in trust for the benefit of, any person or entity.

This broad exception covers most gifts to family members or charities, regardless of whether the gift is made during lifetime or at death through a will or trust. If the transaction is a part-gift/part-sale, the documentary transfer tax is payable on the amount of consideration paid for the property.

Other Miscellaneous Exemptions and Exceptions from the California Documentary Transfer Tax

There are several other exemptions that, although not used often, can be important in limited circumstances.

Conveyances to Implement SEC Orders Relating to the Public Utility Holding Company Act

Section 11924 of the California Revenue and Tax Code provides an exemption for “making or delivery of conveyances to make effective any order of the Securities and Exchange Commission” if:

• The SEC order recites that the conveyance is conveyance is “necessary or appropriate” to give effect to the Public Utility Holding Company Act of 1935;
• The SEC order specifies the property which is ordered to be conveyed; and
• The transfer is made in obedience to such order.

Transfers to Governmental Entity with Reconveyance Obligation

Section 11928 of the California Revenue and Tax Code exempts from documentary transfer tax “any deed, instrument, or other writing by which realty is conveyed by the State of California, any political subdivision thereof, or agency or instrumentality of either thereof, pursuant to an agreement whereby the purchaser agrees to immediately reconvey the realty to the exempt agency.”

Transfers by Governmental Agency to Nonprofit Corporation that Provided Financing

Under Section 11929 of the California Revenue and Tax Code, the California documentary transfer tax does not apply to

any deed, instrument, or other writing by which the State of California, any political subdivision thereof, or agency or instrumentality of either thereof, conveys to a nonprofit corporation realty the acquisition, construction, or improvement of which was financed or refinanced by obligations issued by the nonprofit corporation on behalf of a governmental unit, within the meaning of Section 1.103-1 (b) of Title 26 of the Code of Federal Regulations.

Leases of Real Estate

A lease is a conveyance of real estate for a specified term and, as such, is within the broad inclusion provisions of the Documentary Transfer Tax Act. Although there is no statutory exemption for leases, the court in Thrifty Court v. County of Los Angeles, 210 Cal. App. 3d 881 (1989) found that a lease of real estate for less than a 35-year term is not a “change in ownership” that would trigger the documentary transfer tax. The 35-year term is determined by including the initial term of the lease and any renewal periods.

Example: John leases property to Mary for a 25-year term, giving Mary the option to renew the lease for two additional 10-year terms. Because the total potential term of the lease is 45 years, Mary’s lease exceeds a 35-year term and is potentially subject to the documentary transfer tax.

Some cities use their own criteria to determine whether a lease is a transfer of real estate. In San Francisco, for example, a lease in excess of 50 years is generally considered a transfer of real estate that is subject to the documentary transfer tax.

Temporary Easements

An easement is the right to use or cross someone else’s land for a specific purpose. Easements are included within the broad scope of the Documentary Transfer Tax Act, and there is no specific exclusion. Temporary easements were excluded under the federal law on which the Documentary Transfer Tax Act was based and are thought to be excluded under California law. Permanent easements are clearly included, but to date there is no bright-line test for determining whether an easement is subject to the documentary transfer tax.

Mobile Homes Not Permanently Fixed to Real Estate

As stated above, the documentary transfer tax applies to mobile homes that are fixed to permanent foundations. When a mobile home is permanently fixed to a foundation, it is considered part of the real estate. The transfer of the mobile home fixed to real estate is subject to the documentary transfer tax. But by implication, mobile homes that are not permanently fixed to real estate are not subject to documentary transfer taxes. These mobile homes are more like vehicles than real estate and are thus properly excluded from documentary transfer tax.