Understanding California Property Taxes: A Guide for Homeowners and Investors

Dear Friends & Colleagues,

Property taxes in California can feel complex due to the state’s unique laws and tax assessment practices. However, homeowners and real estate investors can better manage their finances and plan for the future by understanding the basics. This guide covers the fundamentals of California property taxes, key regulations, and tips for effectively managing and appealing property taxes.

1. How California Property Taxes Are Assessed

California's property tax system is primarily governed by Proposition 13, passed in 1978. This law has three main components:

Tax Rate Cap: Property taxes are limited to 1% of the property's assessed value plus any voter-approved local taxes or assessments.

Assessment Limitation: Properties are assessed based on their purchase price (or “base year value”) rather than their market value. For example, if you buy a property for $500,000, your base year value is $500,000, even if the market value rises.

Annual Increase Cap: Property values can only increase by a maximum of 2% per year for tax purposes unless there’s a change in ownership or significant improvements made to the property.

2. Proposition 19: Transfer of Tax Base

In 2020, Proposition 19 was passed, amending property tax rules in California, particularly regarding tax assessments during inheritance and transfers within families:

Inheritance and Family Transfers: Under Prop 19, children inheriting property may no longer inherit the property tax base unless they use the property as their primary residence. This change has impacted estate planning strategies for families across California.

Base Transfer for Homeowners Over 55: Prop 19 allows homeowners who are over 55, disabled, or victims of natural disasters to transfer their existing property tax base to a new home up to three times. This benefit enables those who qualify to move without facing the potentially higher taxes associated with the increased market values of newer properties.

3. Supplemental Tax Bills

When properties are bought, sold, or transferred, a supplemental tax bill is issued based on the difference between the previous owner's assessed value and the new owner’s purchase price. Unlike annual property taxes, due in installments, supplemental tax bills may need to be paid within a few months of the transaction, so new homeowners should be prepared for this additional expense.

4. Understanding Mello-Roos and Special Assessments

Mello-Roos taxes or other special assessments may apply in some California communities, especially in newer developments. These taxes are used to fund public improvements, such as schools, parks, and infrastructure, and can be an additional cost on top of standard property taxes. Mello-Roos districts issue annual tax bills until their bonds are paid off, so it's wise for buyers to inquire about these assessments when considering a property.

5. How to Manage and Appeal Property Taxes

Review Your Assessment Annually: Each year, the county assessor’s office will reassess your property based on Prop 13's limitations. It's crucial to review this assessment for accuracy. If you believe your property value is over-assessed, you can appeal.

File a Property Tax Appeal: If you believe your property's assessed value is higher than its market value, you can file an appeal with your county's assessment appeals board. The appeal deadline varies by county but is generally within 60 days of receiving your assessment.

Seek Professional Guidance: For more complex properties or higher-value homes, consulting a property tax consultant or a real estate attorney may be beneficial, especially when appealing.

6. Commonly Asked Questions

When are Property Taxes Due? In California, property taxes are due in two installments: the first by November 1st (delinquent after December 10th) and the second by February 1st (delinquent after April 10th).

Can Property Tax Increase Beyond 2%? Yes, in cases of a sale, transfer, or major renovation, the property may be reassessed at its current market value, which could result in a larger tax increase. However, the 2% annual cap remains in place otherwise.

7. Looking Ahead: California Property Tax Reform

While Prop 13 has provided stability for many property owners, it has also led to disparities in tax burdens. Over the years, there has been an ongoing debate about reforming property taxes, especially for commercial and industrial properties. As California's housing market continues to evolve, property tax policies may also be subject to change, which could impact homeowners and investors alike.

Conclusion

California's property tax structure provides some stability and predictability for homeowners, but it also comes with complexities, especially for those navigating ownership transfers and appeals. Staying informed on property tax regulations and consulting professionals when necessary can help property owners manage their tax responsibilities and maximize potential tax benefits.

Please feel free to contact me with questions.

Kind regards,

Tina Lucarelli - Global Real Estate Advisor

310-738-8089

DRE 02102354