Taxable Possessory Interests in California

What Are Taxable Possessory Interests?

Taxable Possessory Interests Defined

Under Cal. Code Regs. tit. 18 Sec. 20(b) "Taxable possessory interests" are possessory interests in publicly-owned real property. Excluded from the meaning of "taxable possessory interests", however, are any possessory interests in real property located within an area to which the United States has exclusive jurisdiction concerning taxation. Such areas are commonly referred to as federal enclaves.

Examples of Taxable Possessory Interests

Under Cal. Code Regs. tit. 18 Sec 28 the following are examples of commonly encountered taxable possessory interests:

The right to explore for, capture, and reduce to possession gas, petroleum, and other hydrocarbons in public lands.
The possession of an employee in housing owned by a public agency, irrespective of whether occupancy of the housing is a condition of employment except when the facility also serves as the employee's work area to which the employer has full access.
The right to cut and remove standing timber on public lands.
The right to graze livestock or raise forage on public lands.
The possession of public property at harbors, factories, airports, golf courses, marinas, recreation areas, parks, and stadiums. Possessory interests may include land subject to the ultimate grant of a United States patent, commercial and industrial sites, and water rights.

Valuation and the Direct Income Method

The rules governing valuation of taxable possessory interests are found under Cal. Code Regs. tit. 18 Sec. 21. Section 21(d)(1) provides in relevant part:

“The term of possession for valuation purposes shall be the reasonably anticipated term of possession. The stated term of possession shall be deemed the reasonably anticipated term of possession unless it is demonstrated by clear and convincing evidence that the public owner and the private possessor have reached a mutual understanding or agreement, whether or not in writing, such that the reasonably anticipated term of possession is shorter or longer than the stated term of possession. If so demonstrated, the term of possession shall be the stated term of possession as modified by the terms of the mutual understanding or agreement."

Case Law Interpretation

In the case of Silveira v. County of Alameda (2006) 139 Cal.App.4th 989, the Court of Appeal held that in the case of an assessment of a tenant holding marina property on a month-to-month lease, with a history of prior renewals, the possessory interest could be assessed on an estimated term of three to five years. (Id. at 992.) The Court upheld the Assessor's estimate of reasonably anticipated term, finding that there was evidence of real substance for the reasonably anticipated term of possession that was used [stating]:

"American Airlines does not stand for the proposition that the taxable term of possession can never exceed the stated term of a lease. There were simply no facts in American Airlines on which to find that the leases in that case would be extended beyond their stated terms. Since the lessor had not decided whether the leases would be renewed, and the parties had never discussed and had no understandings on the matter ( American Airlines, supra, 65 Cal. App. 3d at p. 330, fn. 4), expectation of an extension was entirely "unsupported" ( id. at p. 330) and lacked "any real substance at all" ( Id. at 331.) None of these observations would have been relevant if, as plaintiff contends, the stated terms of the leases were by themselves controlling. Under American Airlines, the question is whether there is "support" of "real substance" for the term of possession used." (Silveira v. County of Alameda (2006) 139 Cal. App. 4th 989, 998.)

Significance of "Term of Possession"

"A taxable possessory interest is a privately held property interest in publicly owned real property that meets certain statutory criteria set forth in section 107 of the Revenue and Taxation Code. (Silveira v. County of Alameda (2006) 139 Cal.App.4th 989, 993-94.) Most taxable possessory interests are created by permits and leases granting possessory rights in government land to private parties.... (Id.)

Since a taxable possessory interest is by definition a property interest of limited duration, an assessor valuing a taxable possessory interest must determine a ‘term of possession.’ (Id.) The term of possession is a significant variable in possessory interest valuation, and the assessor reviews it on each lien, or valuation, date. (Id.) The term of possession is particularly important when the assessor uses the ‘direct income method,’ which is the most widely used possessory interest valuation method. (Id.) Under this method, the value of the taxable possessory interest is estimated by discounting the annual economic rent attributable to the taxable possessory interest over a specified term of possession. Since the term of possession determines the number of annual income payments that will be discounted, it significantly affects the assessed value."

Property Tax Rule 21 (18 Cal.Code of Regs. Sec. 21) has the effect of establishing a presumption that the stated term in a document establishing a possessory interest must be deferred to by assessment officials. However, Rule 21(a)(6) provides that the "stated term of possession" for a taxable possessory interest is "the remaining period of possession as of that date as specified in the lease" "including any option or options to renew or extend the specified period of possession if it is reasonable to assume that the option or options will be exercised."

Documents for Taxable Possessory Interests in California

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Estate of: Scott, Heidi Eva document preview

Notice to Government Entities to File Claim - Review Hearing

6 pages

1 Mark Johnson (142984) Attorney at Law 2 2531 Forest Avenue Suite 100 1/3/2024 Chico, California 95928 3 (530) 345-6801 mj@mjlaw.net 4 Attorneys for Petitioner Danielle LeClerc Klein 5 6 7 8 SUPERIOR COURT OF THE STATE OF CALIFORNIA 9 COUNTY OF BUTTE 11 Estate of ) CASE NO. 23PR00579 …