California Real Estate Property Taxes

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Reducing Property Taxes By
Lowering Property Valuation

From the real estate recovery beginning in the latter half of the ‘90s, to the market peak in late 2005 (residential) or 2006 (commercial), to the current deep recession, real estate owners and investors have been on a roller coaster ride. If your hands are in the air, it’s not to enhance the thrill of the ride, but a sign you have given up. But even though the “thrill is gone,” property owners can improve their bottom lines by obtaining temporary or in some cases more permanent reductions to their property taxes.

Property owners who will benefit most are those who still own property acquired in the high value era (from about year 2002 through mid 2007). I recommend that all property owners review their property tax bills to determine whether they are now paying too much. In particular, real estate owners need to understand the difference between a temporary and a permanent reduction in property taxes so they can take advantage of the situation and obtain long term reductions to their property taxes where warranted. Otherwise they may find that their property taxes rapidly increasing again to high value levels when the market recovers.

If the assessed or “factored value” of your property as of January 1, 2009 is higher than its market value as of that date, then you can seek a reduction in your property taxes for the coming (2010-2011) assessment year. You can do so either by (1) making an informal request to the County Assessor’s Office for a “Proposition 8 Decline in Value” review, (2) making a formal appeal (“Request for Changed Assessment”) to the Board of Supervisors (if your informal request isn’t granted), or by (3) changing ownership in a manner that results in a more permanent reassessment.

Property Tax Valuation

First let’s looks at three property tax valuation concepts. The first concept is known as the “Base Year Value”. Under Proposition 13, the Base Year Value serves as the starting point for measuring the maximum Prop 13 assessment value. The Base Year Value generally the market value of the property as of the assessment year in which the property is acquired or the year in which a “change in ownership” occurs.

The Base Year Value may be adjusted if the property is renovated or new construction occurs, but a new Base Year Value will not be established unless there is a change in ownership. This is known as the “factored base year value” or “factored value” which is generally published by the local assessor before the value is formally enrolled on the local tax roll which occurs on July 1 of each year. This is capped under Prop 13 at no more than 2% year over year increase.

The last valuation concept relevant to this discussion is “Market Value”. Market Value is defined under Revenue and Taxation Code (Section 110) using a willing buyer, willing seller approach. So it is the price at which a property, properly marketed, would transfer for cash or its equivalent under prevailing market conditions using a January 1 valuation date. Market Value may be above or below Factored Base Value. Market Value is relevant whenever a change in ownership occurs to establish the new base year value, and is also relevant whenever the market value declines below the factored value.

Until recently, the factored adjustments have generally been increased at a 2% rate because cost of living factors have generally exceeded the 2% maximum amount allowed under Prop. 13.

Proposition 8 allows temporary reduction

Proposition 8, passed by the voters in 1978, allows taxpayers to claim a temporary reduction in value whenever a property suffers a “decline in value.” In such cases as now exist for many property owners, taxpayers can file a Proposition 8 “Decline in Value” request to have the assessed value of the property reviewed and temporarily reduced to the market value as of the most recent January 1 assessment lien date.

Alternatively, property owners can file a formal Assessment Appeal using an Application for Changed Assessment.

Because adjustments under Prop. 8 or a formal appeal are temporary reductions which do not change your Base Year Value, your factored value can be increased on a year over year basis by much more than 2% in future years if you have had periods of recovery after a lengthy decline. At some point we will see year over year increases of 10% or 20%, resulting in much higher property tax costs for owners.

Many people have received temporary reductions through their local assessor resulting in lower property tax bills. The Assessor’s voluntary reductions often have generally not kept pace with the market (no surprise since they have a vested interest in receiving property tax revenue).

But without a change in ownership the reduction in assessed values is only temporary. Very few Assessors are helping find the best long term solution which may require a determination of whether you can make a “change in ownership” to obtain a new “Base Year Value” at today’s lower values.

I recommend that property owners obtain an independent review of their property values by looking at comparable sales that occurred in neighborhood and, if warranted, obtaining an appraisal. You can use this information to prepare your own “Proposition 8 Decline in Value Statement” or to file a formal Application for Changed Assessment. A lot of helpful information, including forms, is available on the State Board of Equalization website (http://www.boe.ca.gov/ proptaxes/proptax.htm). A Decline in Value request must be filed with the Assessor before July 1, 2008 and you must file an “Application for Change of Assessment” with the Board of Supervisors by September 15th (or in some cases November 30th) if it is to apply to the 2010-2011 tax year.

More permanent reduction is complex

If you want to go obtain a more permanent reduction, there are additional complexities involved. There are several ways to change ownership, such as transferring title to a partnership in which a new person owns some small percentage (e.g., owners can transfer ownership of a property to a limited partnership or LLC with a child or key employee added on as a limited partner as to some small percentage.

Alternatively a transfer to certain types of irrevocable trusts will trigger a change in ownership.

There are a number of legal and tax issues to consider when changing ownership. To list a few: how to vest title (form of title), selection of the right type of entity (if any), navigating the complex tax rules applicable to irrevocable trusts, whether the transfer is approved by a lender or will cause an acceleration of a loan, whether the transfer will have income or estate and gift tax consequences. Property owners should consult with their tax and legal advisors before a change of ownership is attempted.

The full details about how to prepare and substantiate a Proposition 8 Decline in Value request or an Application for Change of Assessment are beyond the scope of this article. If you wish to obtain more information on Property Tax Reductions, write to “Property Tax Reduction” c/o Scott G. Beattie at Calone Law Group, LLP, 1810 Grand Canal Blvd, Suite 6, Stockton CA 95207 or e-mail me: sgb@calonelawgroup.com 


Real Estate Property Tax

In the United States, property tax on real estate is usually levied by local government, at the municipal or county level. Those who live in city limits face double property taxation, once by the city and once again by the county. A very important benefit of a tax on property over a tax on income is that the revenue always equals the tax levy, unlike income or sales taxes, which can result in shortfalls producing budget deficits (for example, figuring the sales tax on a item may end up with odd cents that round down; when this is done numerous times by numerous people, the "odd cents" that are rounded down tend to add up).

When You Purchase

When you purchase a home, the county tax assessor reassesses the property and sets a new property tax amount based on your purchase price. Your property taxes will be approximately 1% of your purchase price, plus any voter approved bonded indebtedness of the community. (A common one here is the "Mello Roos" assessment which is added to the property taxes for every home located within the Lincoln School District, This is an additional $67 per year which is added to your tax bill. Weston Ranch and most of the newer San Joaquin County subdivisions also have "Mello Roos".  Another common item is for "pest abatement" and may be about $4 per year. Or a bond for a sewer district which can be $200 per year.)

Thereafter

In future years, the tax assessor is allowed to increase the accessed value by 2% appreciation per year.

Homeowner's Exemption

This is a deduction of $7,000 from the "accessed value" and applies only to owner-occupied properties. Once you've purchased a home you will received a card to fill out to apply for the exemption. The card must be completed and returned between March 1st and April 15th. Applications submitted after April 15th, but before the end of the year will qualify for only 80% of the exemption.

Supplemental Tax Bill

Does this one ever cause problems. Yes, the tax assessor reassesses the property when it is sold, but they don't always get the new tax bill amount "into the system" as it were and the first tax bill that many buyers receive is one which reflects the rate for the previous owner. So you get this bill, think "wow" the taxes aren't as high as I though, pay the bill, send it off and think you are done. Nope. Expect that you will get another tax bill, this one called the Supplemental Tax Bill. It will cover the difference between the old rate (which you already paid) and the new rate (which you really owe).

Important Tax Numbers

Frequently Asked Questions

What are all of these charges on my property tax bill?
Your property tax bill consists of three separate categories of levies: General Tax Levy, Voter Approved Indebtedness, and Direct/Special Assessments. That portion of the bill labeled General Tax Levy is the only amount controlled by Proposition 13. This tax is limited to a maximum of 1% of the assessed value of your property (the "land" and "improvements"), and can be no more than 2% greater than the previous year's tax bill. The portion labeled Voter Approved Indebtedness includes taxes levied to repay bonds approved by the voters. This amount varies greatly from county to county depending upon the number of local bond issues approved. Under current law, local general obligation bonds require a two-thirds majority vote to pass.

The portion of the bill labeled Direct/Special Assessments is now controlled by Proposition 218. Assessments now require a majority "YES" vote of the property owners, with each owner voting the dollar amount of their assessment. Fees charged for the property related services of sewer, water, and refuse collection can be imposed without a vote, but may not be greater than the cost of providing the service

What if I don't agree with the assessed valuation of my property?
If you feel the Assessor's valuation is incorrect you should first call the County Assessor's Office and discuss your valuation with an appraiser. If you cannot reach an agreement with them, your next step is to file an appeal with the Assessment Appeals Board in your county. You will find their phone number listed in the County Government section of your local telephone directory. Please be aware that there is a limited window of opportunity to file an appeal; be sure you meet the deadlines.
How do property taxes affect the value and marketability of my home?
Special taxes and assessments such as Mello-Roos Districts are secured by a lien against your property. Until the bonds issued by the district are paid off, whoever owns the property must pay for this debt. This means that buying a home in a Mello-Roos or Assessment District is like buying a home with another mortgage already attached to it. Wary buyers know to consider a home's tax burden when determining the total cost of the home, and for Mello-Roos districts, sellers are now legally required to provide the buyer with a Notice of Special Tax. However, it is important to note that no disclosure requirement currently exists for Assessment Districts, which place a similar lien and debt burden against your home.
What is Mello-Roos and why do I have to pay it?
Mello-Roos is a form of financing that can be used by cities, counties, and special districts (such as school disricts). Mello-Roos Community Facilities Districts (referred to as "CFDs") raise money through special taxes that must be approved by 2/3rds of the voters within the district. A CFD is formed to finance major improvements and services within the district which might include schools, roads, libraries, police and fire protection services, or ambulance services. The taxes are secured by a continuing lien and are levied annually against property within the district.
How do I pay my Mello-Roos Special Taxes?
In almost all cases, Mello-Roos special taxes are levied as part of the annual property tax bill. You should be able to find your Mello-Roos special tax as a line item on that bill. In rare cases, a Mello-Roos district will send out its own bill. To find out more about this bill, you will need to contact the agency directly.
Can a Mello-Roos district foreclose on my home?
Bonds issued by a Mello-Roos district constitute a lien against your property. If you fail to pay a Mello-Roos special tax, the district may foreclose on your home and use a portion of the proceeds to collect the unpaid amounts. It is important to know that accelerated foreclosure laws apply to Mello-Roos districts, which means that a district can initiate foreclosure 150-180 days after your payment is overdue.
Is my property subject to 180 day accelerated foreclosure?
If your property is part of a Mello-Roos District (Community Facilities District), a 1915 Act Assessment District, or certain other special financing districts, your home is most likely subject to accelerated foreclosure. While the County must wait for five years to foreclose on a property because of delinquent taxes, Mello-Roos and Assessment districts can begin foreclosure proceedings 150-180 days after one of their tax charges becomes delinquent.
Why do I have to give a buyer a Notice of Special Tax when I sell my property?
Since July of 1990, California Civil Code Section 1102.6 has required that sellers make a good faith effort to give property buyers a "Notice of Special Tax" if the property is in a Mello-Roos district. The notice must include the current year's maximum special tax for the parcel, the rate at which that maximum tax may increase per year, and the final date in which special taxes may be collected for bonded indebtedness. Property sold "as is" is not exempt from providing this disclosure, as stated in Section 1102.1 of the California Civil Code.
What is the 1915 Act Bond?
1915 Act bonds are commonly issued by an assessment district to raise money needed to build infrastructure (sewer trunkline, utility line, roads, etc.). The properties that directly benefit from the improvements are then assessed an annual amount on the property tax bill. Normally this will be listed as an Assessment District or Assessment Bond line item on your tax bill. It is important to note that the assessments are secured by a lien on your property, and the district has the right of accelerated foreclosure if assessments are not paid when due
How are tax rates determined?
Your tax rate varies based on the location of your property. A tax rate includes a general 1% tax levy applicable to all property tax bills, voter approved (pre-Proposition 13) special taxes, and voter approved debt issues for your particular area. The general tax levy is based on state law and is limited to 1% of assessed value (or $1 per $100 of assessed value). The tax rates for voter approved debt are computed each year based on the amount needed to pay principal and interest on the debt. Special tax rates are normally determined on a specific formula or can be approved at a fixed rate for a specified duration.
Is there any way I can reduce the amount of property taxes I pay?
If you are having difficulty paying your property taxes, you may qualify for the State's property tax postponement or property tax assistance programs for people who are blind, disabled, or 62 years of age or older. If your annual income is $24,000 or less, you may have the option of having the State pay all or part of your property taxes. This deferred payment is a lien on the property and becomes due upon sale, change of residence or death. For more information on property tax postponement, call the State Controller's Office at 1-800-952-5661.

If your total annual household income is $12,000 or less, you may qualify for property tax assistance, whereby the State provides a cash reimbursement to pay for your property taxes. Filing for the program will not reduce the amount of taxes owed, nor will it result in a lien being placed on your property. For more information on property tax assistance, call the State Franchise Tax Board at 1-800-852-5711.

What is a Homeowner's Exemption?
The most common type of exemption is the Homeowner's Exemption for an owner-occupied residence. Homeowners who own and occupy a dwelling on January 1st as their principal place of residence are eligible to receive a reduction of up to $7,000 of the dwelling's full cash value. The law provides that once you file a homeowner's exemption claim and receive the exemption it is not necessary to file each year as long as you continue to own and occupy the residence on which the exemption is claimed. "Dwelling" means a building, structure or other shelter (including boats) constituting a place of abode, whether real or personal property
Why did I receive a supplementary tax bill after purchasing my new home?
Article XIII-A of the California Constitution (Proposition 13) requires that real property be reappraised whenever a change in ownership occurs. When a transfer occurs, the Assessor receives a copy of the deed and an appraisal is made to determine the new market value of the property. The property owner is then notified of the new assessment, and has the right to appeal the value if he does not agree with it. The amount of the supplemental assessment is the difference between the prior assessed value and the new assessment on the property. This value is pro rated, based on the number of months remaining in the fiscal year. Thereafter the new owner pays the full tax based on the new assessed value. The previous owner is liable for the tax due up to the date of sale; the new owner is responsible for the tax after the date of sale.
Will I receive a tax bill if I pay taxes through an impound account?
If your taxes are paid through an impound account, your lender will receive your annual tax bill and you will receive an information copy. Supplemental tax bills, however, are not sent to your lender. They are mailed directly to you. It is your responsibility to contact your lender to determine who will pay the supplemental tax bill.
What are the consequences if I fail to make a timely payment?
If you do not pay the first installment of your annual tax bill at the Treasurer-Tax Collector's Office by 5 p.m. on December 10* or payment is not postmarked by that date, then the taxes become delinquent and a 10% delinquent penalty is added to any unpaid balance. If you fail to pay the second installment by 5 p.m. on April 10,* or payment is not postmarked by that date, it becomes delinquent and a 10% penalty plus a charge of $10.00 is added to the unpaid balance. If you fail to pay either or both installments at the Treasurer-Tax Collector's Office by 5 p.m. on June 30,** or payment is not postmarked by that date, then the property becomes tax defaulted and additional penalties and costs accrue. *If either December 10 or April 10 falls on a weekend or holiday, taxes are not delinquent until 5 p.m. the next business day. **If June 30 falls on a weekend or holiday, taxes must be paid by 5 p.m. of the preceding business day or the property will be tax defaulted.

If your property is part of a Mello-Roos or Assessment District, your property may be subject to an accelerated foreclosure lien. This can result in additional interest, penalties, collection costs and legal fees if you don't pay your tax bill on time. If your property is in one of these special financing districts, you should make every effort to pay your bill on time. Or, you should contact the District and attempt to pay that portion of your bill separately to avoid any accelerated foreclosure action.

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