A Practical Reform
The rental value of both improved and unimproved land parcels in California can be accurately determined based upon readily available information. For this reason, a tax based on the rental value of land is relatively simple to administer.
Determining the Rental Value of Agricultural Land
Unimproved land, such as farmland, is commonly rented on an annual basis. According to the US Department of Agriculture, in 2009 the average annual cash rent for an acre of California cropland in 2009 was $360 and its selling price was$9,400.
With a tax rate on rental value of 75%, the tax due under the Tax Reform Initiative for an average acre of California cropland will be $22.50 a month or $270 on an annual basis. This is slightly less than 3% of the average selling price per acre. And this land rent tax will be in lieu of the existing property taxes, sales taxes and state personal income tax on the first $150,000 of annual income paid by the individual who owns the land.
An individual landowner earning over $150,000 a year will be able to claim a dollar-for-dollar nonrefundable tax credit on state personal income tax liability for all taxes paid by that individual on the rental value of California land. And land-owning corporations will no longer be paying corporations tax in California.
Nationwide, the USDA reports that 40% of farmland is leased. Enough agricultural land is leased in California, thereby providing comparable rental values, that our state’s public assessors will have no difficulty in accurately determining the rental value of agricultural land.
Determining the Rental Value of Improved Land
Much of California’s most valuable land used for commercial, retail, industrial and residential purposes is improved with costly buildings. Thus, determining the rental value of such land involves (1) ascertaining the total rental value of the improved property, and (2) multiplying the total rental value of the property by the percentage of the property’s value that is land value.
The following example demonstrates these steps. A house in San Diego County located a few doors from this writer’s house was assessed at $395,000 in 2009. Of this total value, the land value was determined to be $218,000 by the county assessor and the value of the improvements (the dwelling itself) was determined to be $177,000. The percentage of land value for this property is 55% ($218,000 divided by $395,000 = 55%).
The house in question is very similar to other houses in its neighborhood, including the size of its land parcel. This house and all other homes within several blocks were built at the same time by the same builder using a small number of different floor plans on “cookie cutter” tract lots.
The rental value of such a house in this neighborhood is $2,000 a month. The monthly rental value of the land alone is $1,100 a month. The land rental value is calculated as follows: multiply the rental value of the entire property, which is $2,000, by the percentage of total value which is represented by the land, which is 55%. Thus, arithmetically, $2,000 X 0.55 = $1,100.
At a tax rate of 75%, the monthly land rental tax due on this property will be $825 a month, or $9,900 a year.
The current property tax on this home, which the owner will not be required to pay after this tax reform becomes effective, for the 2009-2010 fiscal year is $4,544.70. The owners of the house will also not be paying any sales taxes nor will they pay any state personal income tax on the first $150,000 of annual income per person.
As can be seen from the above example, California’s public assessors already separate land value from the value of improvements / buildings for all real property subject to taxation in our state. For parcels with current assessments, the assessed value of the land is usually reasonably accurate. In the case of parcels which lack recent assessments due to the effects of Proposition 13, a comparable parcel with a recent assessment can usually be found for purposes of determining a current land value fraction or percentage.
Commercial, retail and industrial properties are commonly leased by the square foot with rental rates quoted on a per month basis. If the percentage of land value is known for such properties based on recent assessments, then the monthly rental value attributable to the land on which the buildings are located can be quickly and easily calculated.
For instance, if the market net rental rate for a particular type of space is $1.50 a month per square foot (base rate excluding triple net terms) and a building has 60,000 leasable square feet, the net rental value of that building is $90,000 a month. If the value of the land is 40% of the property’s total value, then the rental value of the land is $36,000 a month.
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