Proposition J
Removal of Foreclosure Exemption for Real Property Transfer Tax
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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Fiscal impacts
The measure does not change any tax rate. It ends an exemption, so how much it raises depends on how many large properties go through foreclosure each year. Supporters project $200M over three years. If Prop I also passes, roughly half of that would go to its housing fund instead of the general fund.
According to the Controller's Office, the measure would significantly increase transfer tax revenue, but the amount would be unpredictable and would swing sharply year to year. The Controller estimates an average of $100M to $150M per year over the first five years, with the increases highest early and declining significantly after that.
How much it raises depends on how many foreclosures happen. Applied to FY 2021-22, before the market declined, the measure would have raised $3.2M. Applied to FY 2025-26, it would have raised $232.5M. Based on the early 1990s recession and the Great Recession, the Controller expects foreclosure-related transactions to fall back to non-crisis levels over four to six years. The Controller cautions there may be years when the measure raises next to no new revenue.
Why is this on the ballot?
Assessor-Recorder Joaquín Torres has reported a sharp rise in high-value commercial transfers claiming the exemption, and Supervisor Mahmood says the 1984 exemption has cost the City billions since it was adopted. The measure is the revenue half of a pair: Mayor Lurie and Supervisor Mahmood paused a plan to cut transfer tax rates on new buildings and brought this forward instead.
The exemption is in Section 1108.2 of the Business and Tax Regulations Code. The City can change that section on its own, but the California Constitution requires a public vote before a general tax goes up. The Board of Supervisors voted 10-0 on July 28, 2026 to send it to voters, with Supervisor Walton excused (File No. 260692, Motion No. M26-070).
This was placed on the ballot by the Board of Supervisors. Under Article XIII C of the California Constitution, a general tax can only be imposed or increased by a vote of the people, so the Board cannot make this change on its own. It needs a simple majority of 50% + 1 to pass.
- Placed on ballot by: The Board of Supervisors, by a 10-0 vote on July 28, 2026.
- Sponsors: Supervisor Mahmood, joined by Supervisors Dorsey, Melgar, Chen, Wong, Walton, and Mandelman.