A taxable possessory interest (PI) is created when a private party is granted the exclusive use of real property owned by a non-taxable entity. An expanded definition may be found in Revenue and Taxation (R&T) Code Sections 61, 62, 107-107.9, 480.6, and Property Tax Rules 20, 21, 22, 27, 28 and 29. In very simple terms, for a possessory interest to be taxable it must be independent, durable, and exclusive of the rights held by others.
Independent: The use must be independent of the public owner. That is, its holder may exercise authority and control of the property apart from the rules and regulations of the public owner.
Durable: There must be reasonably certain evidence to show that the possession will continue for a determinable period of time.
Exclusive: Its holder must be able to exclude others from interfering with the use of the property, (or, where there is concurrent use, the concurrent use does not significantly interfere with the holder’s use).
California law exempts public agencies from paying taxes on the property they own, thus the lessee, who acquires the possessory interest, must pay property taxes on the possessory interest. The taxation of these interests is rooted in historical precedent. The California legislature first authorized the valuation of possessory interests for property tax purposes in 1859.
Those who receive possessory interest assessments are often puzzled by the seemingly unfairness of paying rent to a government entity while being asked to pay property taxes as well. However, government entities do not have to pay property tax and thus, their rent charges do not include an increment to recover such taxes (similar to a triple net lease).
At the same time, the private possessor still receives the services and benefits (fire and police protection, schools, and local government) that other similar taxable properties enjoy, and the possessory interest tax helps to pay the holder’s fair share of those costs.
Possessory interests are normally assessed on the Unsecured Tax Roll because the property rights being assessed are not owned by the assessee and cannot provide security for the taxes owed. In other words, the property cannot be used to satisfy any delinquent property tax.
Therefore, possessory interests are assessed as real property on the Unsecured Roll, but still fall under the umbrella of Proposition 13. That is to say, that although they appear on the Unsecured Roll, they are still assessed according to the laws pertaining to secured real property.
The payment schedule for Unsecured Roll tax bills is significantly different than for Secured Roll tax bills and taxpayers should be aware of that difference. Unsecured bills are not split into two installments with two different delinquency dates, as is true of Secured Roll tax bills.