A California appeals court has tentatively ruled that San Francisco cannot use its “Empty Homes Tax,” also known as the vacancy tax, to pressure property owners to rent homes they have chosen to keep off the rental market.

The case was brought by the San Francisco Apartment Association, several individual property owners, the Small Property Owners of San Francisco Institute, and the San Francisco Association of Realtors. The California Apartment Association filed an amicus brief supporting the challenge, authored by Pacific Legal Foundation.

San Francisco voters approved the vacancy tax as Proposition M in 2022. The measure applies to certain residential units in buildings with more than two units that are vacant for more than 182 days in a year.

The tax starts at $2,500 to $5,000 per unit, depending on the unit’s size. The tax increases each year a unit remains vacant and can reach as much as $20,000 per unit by the third year.

The property owners who challenged the measure argued that the tax was designed to force them to rent homes they had decided not to rent. For example, plaintiffs Eric and Andrew Debbane live in a five-unit building and keep the other units for their own personal use. Another plaintiff, a retired owner, said he no longer wanted the burdens of being a landlord.

A San Francisco trial court ruled for the plaintiffs and barred the city from enforcing the tax. The city appealed.

In its tentative opinion, the First District Court of Appeal said the vacancy tax conflicts with the Ellis Act, a California law that protects an owner’s right not to offer residential property for rent.

The city argued that owners still had choices: they could live in the unit, use it for another purpose, rent it out, or pay the tax. But the court was not persuaded. It explained that the Ellis Act protects not only an owner’s right to leave the rental business, but also the right to stay out of it.

Put simply, the court’s tentative ruling says San Francisco cannot make an owner choose between renting a home and paying a large tax for keeping it vacant.

The court also questioned the city’s argument that an owner could avoid the tax by using a residential unit as an office, gym, or art studio. The tentative opinion said that those examples do not fit the purpose of the measure, which was to place more people in homes, and may not be allowed under the city’s own planning rules.

The city asked for oral argument after the tentative opinion was issued. At the hearing, the justices repeatedly pressed the city’s attorney on the same basic problem: Why should San Francisco be allowed to use a steep tax to push owners back into the rental market when state law says they cannot be compelled to rent?

That point helps explain why SFAA and CAA are involved. Housing providers generally do not want to leave rent-producing units vacant. But units can sit empty while repairs or renovation work is underway, when demand is weak, or when an owner has decided not to rent at that time.

More broadly, CAA is concerned that a city should not be able to make rental housing increasingly difficult through regulation and then impose a large tax on owners who decide they cannot, or do not want to, remain in the rental business. The Ellis Act protects against that kind of no-win situation.

CAA’s amicus brief also argued that the vacancy tax is not saved simply because the city calls it a tax. The brief argued that the measure was intended to pressure owners into giving up control over whether to rent their homes.

The tentative opinion did not reach that constitutional question because it found the Ellis Act was enough to decide the case.

The court has not yet issued a final decision. If the tentative opinion becomes final, it will uphold the judgment blocking San Francisco from enforcing the vacancy tax.