A reader recently asked if I’d write a column explaining how property taxes are assessed, how they can change, and how Proposition 13 affects the whole situation. So, here you go.
The money you pay in taxes is based on two things: the assessed value of your property and the tax rate for your area. The assessed value is based on the fair market value of your property (usually the purchase price) at the date of acquisition. Thanks to Proposition 13, increases for inflation are capped at two percent a year.
If property values drop, you can have your home re-assessed and the fair market value adjusted downward, thereby reducing your property taxes. If you ask the County Assessor’s Office to re-calculate the fair market value of your home, but you feel the assessment is still too high, you can appeal the decision to the Property Tax Appeals Board.
The Appeals Board is made up of six citizens, most of whom have been in real estate related business for many years. Members include myself, a real estate broker; Bill Barksdale, a real estate agent from Willits; Jeff Kram, a real estate agent from Ukiah; Jim Ronco, a retired title officer from Ukiah; Maryellen Sheppard, an appraiser from the coast; and Ross Liberty, a local businessman who owns a manufacturing facility. All of these folks, with the possible exception of me, are held in high regard for their integrity and knowledge.
When a property changes hands, the value of the property is reassessed, unless it is a rare exception to the “reassessment on transfer” rule. The most common exception is when parents transfer the title of the home to their children.
The tax rate in Mendocino County is based on one percent of the fair market value plus any approved special taxes. Typically, the tax rate is 1.1 – 1.2 percent total. So, if you plan to buy a home, you’ll need to budget about a tenth of a percent of the purchase price for property tax per month (e.g., if you buy a home for $250,000, you’ll owe about $250 per month). Taxes are due twice a year, and come with a hefty late fee, so be sure to pay attention to the due date.
The reason taxes cannot go up more than two percent a year is because of Proposition 13, passed in 1978. Before Proposition 13, California counties would estimate their budget expenses for the year. They would then deduct anticipated revenues, and whatever was left over (budget shortfall) would be divided by the assessed value of all of the properties in the county and paid for by property owners. As you can imagine, this system resulted in property tax rates many times higher than they are today.
Now, the only way for your property taxes to go up more than two percent (if you don’t buy or sell a property) is if you complete home improvements that increase the assessed value of your home. Even then, the assessor can only increase the fair market value on the improvement, not on the whole property.
Sometimes you may hear whispers of Property 13 being changed, but repealing Prop. 13 in its entirety would be political suicide for a politician to recommend. Counties may need additional revenue, but balancing the budget on the backs of home owners already proved to be a very unpopular approach. If not increasing all property taxes more than two percent, some have quietly suggested that business and commercial real estate be taxed more. The truth is that commercial property owners are likely to pass on any increases in property taxes to their customers. Part of the cost of the bread and milk you buy at the grocery store pays for the property taxes on the grocery store dairy and bakery properties. If Proposition 13 ever changes, we will all end up paying (homeowner or not).
Next time I’ll write about the PACE Program and whether the program can meet its worthy goals. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at firstname.lastname@example.org or visit our website at www.realtyworldselzer.com. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.