The proposed tax explicitly excludes residential spaces within mixed-use properties. It also will not apply to properties undergoing renovation or repair under an approved building permit, with construction work ongoing for at least 90 consecutive days; properties subject to litigation, environmental reviews, or permitting delays that prevent occupancy; or properties affected by natural disasters, including buildings that state or local authorities deem uninhabitable.

Property owners subject to the tax must register with the California Department of Tax and Fee Administration (CDTFA) and electronically file annual returns by March 15 of each year, reporting the prior calendar year’s vacancy status, property square footage and applicable exemptions.

Owners may be required to present supporting documentation, including lease agreements and utility records. Owners intentionally misstating information or making fraudulent claims would face civil penalties of up to 75% of the total tax liability.

If SB 789 is enacted by a two-thirds majority in both chambers of the legislature and signed by the governor, it will become effective on July 1, 2028, with initial tax obligations due in 2029. Starting in 2033, CDTFA will issue economic evaluations every five years tracking the tax’s impact, effectiveness and compliance costs.

However, according to an article in the National Law Review, the implementation of SB 789 faces potential constitutional challenges arising from pending litigation making its way through the California courts.

In November, a Superior Court judge struck down a residential vacancy tax approved by San Francisco voters in a 2022 ballot measure.

Judge Charles Haines issued a summary judgment in favor of a coalition of property owners and real estate groups who challenged what is known as the Empty Homes Act. The plaintiffs included the San Francisco Apartment Association and the San Francisco Association of Realtors.

The Empty Homes Act imposes annual taxes, starting at $2,500 to $5,000 per vacant unit and escalating to as much as $20,000 annually for larger properties, on residential units left vacant for more than 182 days in buildings with three or more units. Under the measure, the tax rate is higher for larger units and increases the longer a home is vacant.

Also known as Proposition M, the Empty Homes Act was approved by 54.5% of San Francisco voters in November 2022. The measure took effect on January 1, 2024, with the first filing deadline for owners of vacant homes scheduled for April 20, 2025.

Attorneys for the plaintiffs in the lawsuit, which was filed in February 2023 and named the city and county as defendants, argued that the Empty Homes Act violated the U.S. Constitution's Takings Clause as well as California's Ellis Act, which protects property owners' right to remove units from the rental market.

The city has filed an appeal of Judge Haines’ ruling. According to the National Law Review, “the city of San Francisco’s appeal of the trial court decision creates legal uncertainty about the constitutionality of vacancy taxes. If the First District Court of Appeals upholds the trial court’s ruling, it may set a precedent that prevents SB 789’s enactment.”