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A Short Course on Prop 13:
You need to understand this if you own property!
An essential element of property ownership is (like it or not) Property Taxes. And in California, the entire Property Tax concept is driven by the Jarvis-Gann Act, generally known as Proposition 13. Enacted in the late 70's, in response to sky-rocketing property values, Prop 13 places a limit on how much the taxable value on a given property can go up in one year.When a property is purchased (or otherwise changes ownership), the County Assessor enrolls a value for that property. This value is the Assessor's best estimate of market value and in most cases, this is the purchase price. The tax year following the year of purchase is called the Base Year, and the value enrolled is called the Base Year Value (BYV).
From there, the Assessor can only raise the BYV by a maximum factor of 2%. So, you buy a home for $100,000 and the next year the BYV is factored by 2% and you pay taxes on $102,000. The next year, that $102,000 is factored by 2% again, and so it goes.
There are several exceptions to the 2% Factor. Some of them will cause the Taxable Value to be reduced and others will cause it to increase by more than 2%. These exceptions include New Construction, Changes in Ownership, decreased market value, as well as restoration of value after a decreased market.
New Construction
Any construction that increases the value of a property can be added to the BYV. This could be anything from a swimming pool or air conditioning to a room addition or complete remodel. The existing BYV will not be affected. Only the value associated with the new construction will be added.
Changes in Ownership
Adding or removing a person from title can trigger a reassessment of the percentage that changed ownership. There are, of course, myriad exceptions and caveats to this. Some of these will be covered in future articles, while others may require the advice of a Property Tax Attorney or an accountant.
Decreased Market Value
The law requires the Assessor to enroll the lower of the two values: either the Factored BYV or the current market value. When the Factored BYV steadily climbs, but the market value falls, the Assessor is required to temporarily reduce your taxable value. If they miss your property, or don't reduce it enough, you may file an appeal and try to get the value reduced.
Did I say "temporarily reduce" the value? I did. When the market returns, the Assessor is required to enroll a...
Restoration of Value after a Decreased Market
Remember, the Assessor tracks the Factored BYV and the current market value of every property in the county and is required to enroll the lower of the two. If the market has been low and values reduced, it will come back, usually at more than 2% a year. When the market surges and values begin to climb again, the Assessor can (and will!) restore the taxable value on a property to the full market value, or the Factored BYV, whichever is lower. There is no maximum percentage under these circumstances as long as the taxable value does not exceed the Factored BYV. Depending on the market conditions, this could mean a sizable increase in taxable value in just one year!
Yes, this is just the basics behind Prop 13. There are volumes of Tax Codes and court decisions and Constitutional Amendments out there. In most cases, the rules are fairly straightforward and easy to understand. Over the next few months, I will be writing a series of articles to help you become more aware of some of the more common situations in property tax. In the meantime, I can always be reached at 714-296-9421 or realtorglen@yahoo.com with questions.
It is always best to contact a tax professional (attorney or CPA) for the best advice.