What is it?

Prop J would end the transfer tax exemption for foreclosures, except on small residential buildings.

San Francisco charges a transfer tax every time property changes hands. The rate depends on the value and applies to all of it, reaching 5.5% from $10M to $25M and 6% at $25M or more. Since 1984 one of its exemptions has covered the deed a lender receives when it takes a property back through foreclosure. That exemption is capped at the amount still owed on the loan, so a lender who recovers no more than the debt pays nothing. It was written to protect a lender eating a loss, not to hand a building to a new owner tax-free.

How a buyer uses the exemption

Prop J aims to fix a modestly technical way for a new buyer to avoid paying the transfer tax:

Rather than the lender foreclosing and selling the property to a prospective buyer, which would be taxed, the buyer instead buys the loan from the lender, which conveys no property and so is not taxed. Now holding the loan, the buyer forecloses on the old owner and takes the deed, which is exempt from the tax.

The building has transferred to a new owner but the City has collected no transfer tax. The sale that would normally be taxed, from the old owner to the new one, never happens on paper. The exemption was meant to spare a lender recovering a bad debt, but it ends up sparing the buyer at the end of the chain.

What would change

Starting with transfers on March 1, 2027, the exemption would cover only small residential buildings. A foreclosure of anything else would be taxed, and the bill would be based on what the property is worth rather than the price on paper. In these deals the price on paper is the unpaid loan balance, not the true fair market value of the building.

The measure also reaches foreclosures on the company that owns a building, not only on deeds. Some loans are secured by the owner's stake in the LLC that holds the building rather than by the building itself. Foreclosing on that stake delivers the building without any deed being recorded, so the measure taxes those transfers too.

What remains exempt

Small residential buildings keep the exemption. Qualified residential properties are: single-family homes, condos, co-op units, single live/work units, buildings with four or fewer homes, and mixed-use buildings with four or fewer homes and one floor of space that is not housing. One unit built for travelers or other short-term guests disqualifies the whole building. Everything else loses the exemption, including offices, shops, hotels, and apartment buildings with five or more homes.

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