Recent California Decisions on Real Property, Floods, and COVID: Taxpayers One, Government One
California property owners during the past six years have faced the Four Horsemen of fires, floods, earthquakes and COVID, wreaking havoc on their properties’ economic viability and the structures themselves. The resulting tax controversies are now wending their way through courts and administrative panels, with mixed results for taxpayers. On the one hand, in Appeal of Robert and Julie Mitchell (2026-OTA-196P) (Jan. 13, 2026), the California Office of Tax Appeals (OTA) sided with the taxpayers against the Franchise Tax Board (FTB), holding that they could do a “tax free” rollover of their sales proceeds from flooded property under Internal Revenue Code (Code) section 1033 even though only part of the property was destroyed. On the other hand, in The Retail Property Trust v. Orange County. Assessment Appeals Board No. 1 (Cal. App. 4th Dist. G064887 April 15, 2026), the California Court of Appeal, Fourth Appellate District sided with the government and held that economic devastation from COVID lockdowns (and the virus itself) were not “physical” harm to the property justifying a lowered assessment for property tax purposes. Mitchell and Retail Property have ramifications as property owners continue to deal with the fall-out, including taxes, from these upheavals.
Mitchell: Mostly Destroyed Is as Good as All Destroyed for a 1033 Deferral
If an owner loses property involuntarily – for example, by condemnation or threat of the same, or “destruction in whole or in part” (the statutory language) by fire or other disaster – he or she may get proceeds from the loss (through government compensation, insurance payout, or “exit” sale) that exceeds the investment. To avoid capital gain tax on the excess, the owner can defer the gain by using the proceeds to buy or build replacement property within 2 years (which the IRS can extend by another 2 years).
A frequent issue is whether and how the taxpayer can do a 1033 roll-over if only part of the property is lost in condemnation or destruction. In Mitchell, Robert and Julie Mitchell owned an investment property in Fresno consisting of three buildings on a single lot, connected by a covered, two-story breezeway with second-floor walkways. They leased the complex to a charity. An April 2017 storm flooded the complex and two of the buildings were destroyed while the third stayed usable and the charity had to move its operations into the usable building. The Mitchells learned they would have needed $1 million (after insurance) to repair the other two buildings. Instead, they sold the entire property to the charity and used the proceeds to buy a new investment property in Monterey and claimed section 1033 deferral.
The FTB challenged the deferral, arguing that this wasn’t a “good” section 1033 rollover because the two damaged buildings and one usable building were not a single economic unit and the usable building had not been destroyed. The Mitchells appealed and the OTA agreed with them unanimously, holding:
- the buildings were interrelated in operation and structure and therefore were a single economic unit; and
- courts and the FTB should not override the Mitchells’ well-documented and reasonable investment judgment that it made better sense to sell the entire complex than try to repair the two unusable buildings.
In fact, the OTA called out the extreme implication of the FTB’s position: If a damaged property can technically be repaired, it can never qualify for a tax deferral no matter how severe the damage or how costly the repairs. Mitchell is a precedential decision, so taxpayers can rely on it in future controversies before the OTA.
Retail Property: No Property Tax Assessment Reduction for COVID
California Revenue and Taxation Code section 170 lets an owner apply to the local assessor for a valuation reduction – and resulting lower property taxes – if “property was damaged or destroyed” from one of three causes (the common thread to them being a “misfortune or calamity”). In Retail Property, the owner of the Brea Mall had to close it for more than 100 days in 2020 after Governor Newsom declared a COVID state of emergency. The owner applied for section 170 relief but the Orange County authorities said “no” on the ground that there was no physical harm. The California Court of Appeal, Fourth Appellate District, agreed unanimously: Neither government orders restricting access to property nor the COVID virus itself were physical harm to the property itself supporting relief. The “physical” requirement appears nowhere in section 170, but the Court scrutinized the California Constitution and other decisions in arriving at this conclusion.
Take-aways
- Section 1033 roll-overs are easier for partly destroyed property. Fires, floods and earthquakes may destroy part of a property but leave the rest useable. For those taxpayers who want to do a 1033 rollover, Mitchell offers relief but a taxpayer must make a case that, first, the destroyed and useable parts were a single economic unit and second, if the taxpayer sold the property then he or she did so after making a business decision that it was not worth the money trying to bring the destroyed parts back to life. Although Mitchell is not binding in a federal controversy with the IRS, the decision can be persuasive because the OTA followed federal precedent and the reasoning is solid.
- COVID property tax relief denied (for now). The Retail Property decision disappointed taxpayers who had lost revenue and property values from COVID – because of lower traffic and government lockdowns – and sought property tax relief. Other appellate districts may conclude differently and taxpayers may need to wait for resolution by the California Supreme Court. In the meantime, property owners may want to file protective claims for relief so that, if courts rule in favor of taxpayers despite Retail Property, the relief door will not be shut because the filing deadline passed. (Retail Property does not affect relief applications by taxpayers who, like the Mitchells, lost property through flooding or other physical destruction.)
- The great question: Is 1033 relief available for COVID? Considering Mitchell and Retail Property together, one might ask: Is COVID a “destruction” or “condemnation” for 1033 purposes so that, if the owner sold because the economics and value of the property plummeted from the virus and/or lockdowns, the owner can roll the proceeds into new property? In other words, does “destruction” under section 1033 require “physical” harm? There is plenty of commentary on this question, but as far as federal tax panels and the OTA go the jury is still out.
