If you’re a California property owner that obtained a reduced assessment in prior years, there’s a chance you could be in for an unpleasant surprise when you see your next property tax bill.
Most property owners are used to seeing their property taxes increase slightly each year – this is because California’s Proposition 13 restricts the annual increase in a property’s taxable value to 2%. In addition, when prices go down, Proposition 8 allows a property’s taxable value to be reduced temporarily to the current market value. The property’s taxable value is then reviewed each year and adjusted up or down to reflect the current market value.
When the real estate market tanked, the value of many properties dropped dramatically and many property owners received temporary reductions in the taxable value of their real estate – resulting in lower tax bills. Now, as values have risen, the new taxable value CAN increase more than 2% if the property’s market value increases more than 2% beyond the temporarily reduced amount. That value can go as high as the factored Proposition 13 value, which is the original market value plus a 2% increase for each year after.
To better understand this, let’s take a look at an example: In 2006, during the housing bubble, Bob bought a home for $1,000,000. A year later, at the height of the market in 2007, the market value of his home rose to $1,300,000. However, because of Proposition 13 restrictions, the taxable (factored base year) value of his home during that year could only increase by 2% above the base year, to $1,020,000. By 2009, the taxable value had increased 2% each year to $1,061,208. However, during that time the real estate market suffered a serious decline and the market value of Bob’s home was only $700,000. Under the Proposition 8 rules, the Assessor in Bob’s County decides to enroll him for a temporary reduction in the taxable value down to $700,000, significantly lowering Bob’s property taxes. In 2012, with the real estate recovery just beginning, Bob saw the market value of his home increase to $800,000, which the County Assessor enrolls as the assessed taxable value for his home that year. In 2014, with the market recovery in full swing, the market value of Bob’s home finally increases back up to $1,200,000. Because of this, the County Assessor ends Bob’s temporary reduction, increasing the assessed taxable value back to the factored base year, which has increased by 2% each year since 2006.
If you think the assessed value of your property might be too high, you should contact the assessor of the county where the property is located. A listing of county assessors and their contact information can be found at: https://www.boe.ca.gov/proptaxes/assessors.htm. The California State Board of Equalization oversees county assessors and develops property tax assessment policies – visit the BOE Property Tax page at: https://www.boe.ca.gov/proptaxes/proptax.htm to learn more.
This is just one of the many tax issues affecting California property owners this year. Richard Welling LLP focuses on tax services for real estate – if you need help, give us a call.