Ask A Maritime Attorney: Can you explain the property tax allocation after purchasing a used boat?
I bought a used sailing yacht through a California broker earlier this year. We used the California Yacht Brokers Association (CYBA) form purchase contract supplied by the broker, which called for the parties to check a box to pro-rate property taxes for the year. I have a few questions about the procedure for the tax allocation, starting with whether a buyer legally required to participate in the pro-ration? I don’t live in California and I don’t understand why I was asked to pay a share of the seller’s Orange County property taxes. Second, I have heard varying reports about the proper tax year to use for the allocation of tax. And finally, the contract did not spell out the exact amount that I would have to pay. Can you clear this up?
The allocation of personal property tax between the buyer and seller of a yacht is a common provision of most purchase contracts in California. However, like most other contractual terms, the allocation is not required by law and it may be negotiated between the parties.
Under the circumstances described in the reader’s question, the buyer may want to opt out of the allocation provision since he is not a resident of the county that assessed the tax. On the other hand, the seller may require the allocation since he will not be the owner of the boat for a part of the year for which the tax has been assessed. A well drafted purchase contract such as the form produced by the CYBA will include a provision which allows the buyer to “opt out” of the allocation, but this will ultimately depend on the negotiations between the parties.
When the parties agree to allocate the property tax assessment between them, the most logical basis for the allocation is to divide the calendar year based upon the closing date of the transaction. Under this method, the percentage of the calendar year that the boat was owned by each party is calculated, and that percentage is applied to the tax assessment for that year. The buyer will then be required to pay that amount to the seller at the closing of the transaction. Note that the seller will be the “taxpayer” for that calendar year regardless of the closing date of the sale, so the buyer’s portion is paid to the seller as a reimbursement, rather than directly to the County.
As evidenced by our reader’s question, there is some confusion over the proper tax year to use for the allocation of property tax. A boat owner’s annual tax bill indicates the fiscal year covered by the bill, which typically spans from July 1st of the current year through June 30th of the following year. However, the legal obligation to pay the tax to the County is assigned to the person who owned the boat on the “assessment date,” which in California is always January 1st. Since the person who owns the boat on January 1st is responsible to the County for the entire year’s property tax payment, the allocation of the tax between buyer and seller should be based upon a calendar year pro-ration.
If the buyer and seller agree to pro-rate property taxes for the year of the purchase, the closing statement prepared by the broker will spell out the exact amount of the property tax allocation between the parties, but this may not actually be listed in the purchase contract since the CYBA form does not include a place for that amount. This may cause some confusion, but the exact amount may not be available at the time the contract is signed because the parties won’t know the exact closing date until after the completion of the buyer’s survey and satisfaction of other contingencies. The brokers should nonetheless be able to provide an estimate so there are no surprises at closing. The broker will be prepared for this since, if the purchase is made through a California broker, he or she will be required under California law to specify the applicable tax year in the purchase agreement, as well as the actual pro-rated amounts payable by the seller and buyer.
The question of whether to pro-rate property tax on a boat purchase, and the allocation of that amount between the parties, both fall squarely within the duties of a yacht broker in California. The Broker and Salesperson license examinations conducted by the California Division of Boating and Waterways actually include property tax questions to ensure that the licensees know their way around this issue. Buyers and sellers seeking additional information about their obligations under a purchase agreement should nonetheless talk to a maritime attorney with experience in yacht purchase and sale transactions.
David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at (562) 799-5508, through his website at www.weilmaritime.com, or via email at firstname.lastname@example.org.