California voters will have the opportunity to cast their votes for or against “Proposition 40” in the November 2026 general election. If approved, the measure would impose a one-time 5% wealth tax on certain individuals and trusts with a net worth of $1 billion or more.
Overview of the Proposal
The proposed tax would apply to California resident individuals and trusts whose net worth equals or exceeds $1 billion. The proposal generally determines whether a taxpayer is subject to the tax based on their residency status as of the initial obligation date of Jan.1, 2026, and then measures net worth as of the valuation date on Dec. 31, 2026. For married taxpayers, assets generally would be aggregated and the spouses treated as a single taxpayer for purposes of applying the $1 billion threshold.
The proposed tax would apply to a taxpayer’s worldwide net worth, less certain liabilities, rather than being limited solely to California-source assets. Net worth is defined broadly and includes direct and indirect ownership interests in businesses, investment assets, trust interests, tangible personal property, and other assets, subject to various inclusions, exclusions, and valuation adjustments.
While the proposal excludes real property held directly by a taxpayer or through a revocable trust, it contains detailed trust aggregation rules and broad anti-avoidance provisions that may limit the effectiveness of transactions undertaken primarily to reduce exposure to the tax.
The proposed tax rate is generally 5% of net worth. However, the tax would phase in for taxpayers with a net worth between $1 billion and $1.1 billion. Taxpayers subject to the tax would be required to report and pay the tax with their California income tax returns. Although the proposal includes an installment payment option, taxpayers electing that option would be subject to an interest charge on the unpaid balance.
Broad Net Worth Base and Valuation Rules
Assets potentially included in the net worth calculation may consist of publicly traded securities, privately held business interests, partnership and LLC interests, carried interests, trust interests, financial instruments, intellectual property, artwork, vehicles, collectibles, and other tangible personal property.
Publicly traded assets would be valued based on market value. Privately held business interests, however, would be subject to specialized valuation rules that could require complex analyses and appraisals.
Key Exclusions and Special Rules
Real Estate Exclusion
One of the proposal’s most significant exclusions applies to certain real property. Under the proposed legislation, real property held directly by a taxpayer or through a revocable trust would be excluded from the net worth calculation. However, real property (including real property outside of California) owned through an LLC, partnership, corporation, or other legal entity (other than a revocable trust) is not excluded and must be included in the taxable net worth calculation. Consequently, taxpayers with substantial real estate holdings should carefully review existing ownership structures well in advance of the valuation date.
Tangible Personal Property Located Outside California
The proposal also excludes certain tangible personal property located outside California for at least 270 days in 2026. This provision may be relevant for taxpayers owning aircraft, yachts, artwork, collectibles, vehicles, and other high-value assets.
However, taxpayers should be mindful that temporary relocations or transactions undertaken primarily to avoid the tax may be challenged under the proposal’s anti-avoidance provisions.
Trusts and Estate Planning Structures
Trusts and estate planning arrangements represent another significant area of focus. The proposal contains detailed rules addressing grantor trusts, certain non-grantor trusts, and transfers of assets to trusts. As a result, existing trust structures should be reviewed carefully to determine whether trust assets may be attributed to an individual taxpayer’s net worth and become subject to the proposed tax.
Debt, Charitable Planning, and Entity Structures
Taxpayers should also evaluate debt arrangements, charitable planning strategies, entity ownership structures, and overall asset-holding arrangements. However, it is important to note that the proposed legislation grants the Franchise Tax Board broad authority to challenge transactions lacking economic substance or undertaken primarily to obtain a tax benefit inconsistent with the intent of the measure.
Planning Considerations
Although the California Billionaire Tax has not been enacted and will undoubtedly face legal challenges if approved by voters, potentially affected taxpayers may benefit from beginning the review process now. Areas warranting examination include asset composition, entity structures, trust arrangements, real estate ownership, liabilities, valuation methodologies, and charitable planning opportunities.
Given the potential magnitude of the tax and the proposal’s expansive valuation, aggregation, and anti-avoidance rules, taxpayers who may approach or exceed the $1 billion threshold should consider evaluating the proposal’s potential impact well before the Dec. 31, 2026, valuation date.
If you have any questions about the proposed tax, please reach out to your CBIZ SALT team member.
Frequently Asked Questions
Proposition 40 is a ballot measure that would impose a one-time 5% wealth tax on certain California resident individuals and trusts with a net worth of $1 billion or more if approved by voters in November 2026.
The tax would generally apply to a taxpayer’s worldwide net worth, less certain liabilities. Net worth would include many asset types, such as business interests, investment assets, trust interests, intellectual property, artwork, and other tangible personal property.
Yes. Certain real property held directly by a taxpayer or through a revocable trust would be excluded. The proposal also excludes certain tangible personal property located outside California for at least 270 days during 2026.
The proposal contains detailed rules for trusts, asset aggregation, and anti-avoidance provisions. Taxpayers with significant real estate holdings, trusts, or complex entity structures may need to assess whether those assets could be included in taxable net worth.
Individuals and trusts that may approach or exceed the $1 billion threshold should consider reviewing asset composition, valuation methods, trust arrangements, real estate ownership, liabilities, and charitable planning strategies before the Dec. 31, 2026, valuation date.
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