San Francisco's Empty Homes Tax just took another major hit. In mid September, the California Court of Appeal, First Appellate District, issued its final published opinion upholding the trial court's ruling that blocks the city from enforcing the tax. Earlier this month the court had issued a tentative ruling pointing the same way. Now it is official.
If you own a three unit or larger apartment building in San Francisco, or you are thinking about buying one, here is what happened and what I think it means for you.
What Is the San Francisco Vacancy Tax?
San Francisco voters approved the vacancy tax as Proposition M in November 2022. It applies to certain residential units in buildings with more than two units that sit vacant for more than 182 days in a year.
- Starting tax: $2,500 to $5,000 per unit, depending on the size of the unit
- Escalation: the tax increases every year a unit stays vacant
- Maximum: up to $20,000 per unit by the third year
The city's goal was to push an estimated 4,000 vacant units back onto the rental market.
Who Challenged the Tax
The lawsuit was brought by the San Francisco Apartment Association, the Small Property Owners of San Francisco Institute, the San Francisco Association of Realtors, and several individual owners. The California Apartment Association supported the challenge with an amicus brief written by Pacific Legal Foundation.
The individual owners had real reasons for keeping units off the market. Two brothers who live in a five unit building keep the other units for their own family's use. A retired owner simply did not want to be a landlord anymore. Under Prop M, both would have faced a growing tax bill every year.
Why the Court Blocked Prop M: The Ellis Act
The trial court ruled for the owners and barred enforcement. The city appealed and lost.
The appeals court found that the vacancy tax conflicts with the Ellis Act, the 1985 state law that protects an owner's right not to offer residential property for rent. The key point in the ruling is that the Ellis Act protects more than the right to leave the rental business. It also protects the right to stay out of it.
The city argued owners still had options: move in, use the unit for something else, rent it, or pay the tax. The court did not buy it. Forcing an owner to choose between renting a unit and paying a steep annual penalty for keeping it empty is exactly the kind of pressure state law does not allow. The court also questioned the city's suggestion that an owner could avoid the tax by turning an apartment into an office, gym, or art studio, noting those uses do not fit the purpose of the measure and may not even be permitted under the city's own planning rules.
Because the Ellis Act was enough to decide the case, the court did not rule on the owners' constitutional arguments.
Is the Vacancy Tax Dead?
Not completely. The city can still ask the California Supreme Court to review the decision. As of this writing, the City Attorney's office has said it respects the ruling but has not said whether it will seek further review. Until that window closes, I would treat this as a strong win for owners, not the final word.
What This Means for San Francisco Apartment Owners and Buyers
Owners have more control over vacant units
Units sit empty for plenty of legitimate reasons: a long renovation, a slow leasing market, a unit held for family, or an owner who has decided to step back. For now, those decisions no longer come with a penalty that climbs to $20,000 per unit.
Buildings with vacancies are easier to underwrite
For buyers, a vacant unit used to carry a question mark. How long will it take to lease or renovate, and what will the city charge in the meantime? With the tax blocked, that risk is off the table for now, which makes buildings with vacancies and value add opportunities cleaner to price. Owner users and buyers planning a phased renovation benefit the most.
Regulation is still the biggest variable in San Francisco
This ruling does not change rent control, just cause eviction protections, or the rules and costs that come with an Ellis Act withdrawal. San Francisco remains one of the most regulated rental markets in the country, and the city has shown it is willing to test new approaches. Anyone buying here needs to underwrite that reality.
Thinking About Buying or Selling an Apartment Building in San Francisco?
I have spent 18 years selling apartment buildings across San Francisco and the Bay Area, and rulings like this one move values at the margin. If you own a building with vacant units, are weighing a sale, or want to know how this affects what your property would trade for today, I'm happy to walk through it with you. Call me at (415) 254 7071 or email [email protected].
This post is for general information only and is not legal advice. Talk with a qualified attorney about your specific situation. Sources: California Court of Appeal, First Appellate District; California Apartment Association; San Francisco Apartment Association.
