But in California, in 1978, the voters passed Proposition 13. At the time, property values were soaring and elderly owners living on fixed incomes whose homes were paid for were losing those homes because they couldn’t afford to pay the taxes! Proposition 13 capped the maximum percentage a property’s assessed value can increase at 2% annually, with reassessments to “true” values occurring at the time the property changes hands.
My parents bought the home I grew up in new in 1971. They paid $32,000 for it. Property taxes on that would’ve been about $400 annually. They put $1000 down and their payments were about $210 per month. At the peak a few years ago, that home was probably worth about $825,000. Without proposition 13, the property taxes would be over $10,300 per year, which translates to over $850 per month just for taxes!
But thanks to proposition 13, taxes on that property, which is still in my family, are under $1200 per year. If my family sells the property, worth about $750,000 today, the new owners’ taxes would be calculated on the $750,000 new assessed value, and then their protections under proposition 13 would begin. But until then, the current owners are assured the taxes will remain within reach of where they were when they bought the home.
Proposition 13 protects us when homes we own in California appreciate. But what happens when values go down?
Many homes today that were purchased after 2003 are currently worth less than the owners paid for them. This may not mean that the properties are “upside down” (meaning that the loan balance is higher than the value), because not all buyers borrowed 100% of the purchase price at the time. Some put cash down, and some bought with all cash, so these buyers may still have equity today. Nonetheless, these owners can benefit from a “decline in value reassessment”.
Also in 1978, California voters passed Proposition 8, a constitutional amendment that says that the property tax assessor must use either a property’s proposition 13 value or its current market value, whichever is LESS. Property values are assessed as of January 1 each year (even though the property tax fiscal year goes from July 1 to June 30… strange…), so if this past January 1 your property was worth less than it was last January 1, then you may be eligible for a decline in value reassessment.
I say “MAY” because if your assessed value is already below your property’s market value thanks to proposition 13, then your tax assessment may already be as low as it can go.
Take, for example, my family home – purchased for $32,000 in 1972. Its market value today is probably about $750,000; however, its assessed value is only $91,000. Even though the value has decreased over the last 2-3 years, the property 13 assessment is still well under the decreased market value, so the proposition 13 value is what the assessor will use as the taxable value. This year, even though values may have decreased again since last January 1, the assessed value of my family’s property will likely go UP since proposition 13 allows for a 2% increase when the current assessed value ($91,000) is less than market value ($750,000).
Let's take an example of someone who bought within this decade. Let's say someone bought a property in 2003 for $500,000. At a tax rate of 1.15% (a common rate in OC), property taxes at the time of purchase were $5750 annually. Let's look at the next few years:
- 2004: mkt val $550,000, Prop 13 assmt $510,000, taxes $5865
- 2005: mkt val $600,000, Prop 13 assmt $520,200, taxes $5983
- 2006: mkt val $600,000, Prop 13 assmt $530,604, taxes $6102
(value stayed the same but taxes went up since assessed value was already low) - 2007: mkt val $550,000, Prop 13 assmt $541,216, taxes $6224
(value went down but taxes went up since assessed value was already low) - 2008: mkt val $525,000, Prop 8 assmt $525,000, taxes $6038
(prop 13 value - $541,216 - exceeds market value, so Prop 8 value used) - 2009: mkt val $500,000, Prop 8 assmt $500,000, taxes $5750
(prop 13 value - $541,216 - exceeds market value, so Prop 8 value used)
If the value returns to $525,000 by January 1 2010, the assessment will go all the way back to $525,000, even though that exceeds the 2% increase normally allowed by Prop 13. This is because the Prop 8 decline in value assessment is considered temporary. The assessed value will continue to go up at market rate until the market value exceeds the Prop 13 value of $541,216, at which point the assessor will be able to add a maximum of 2% to that $541,216 number for the new assessment.
The bottom line is that you should find out what your property’s assessed value is, and have a real estate professional evaluate your property’s current market value even if you have no intention of selling, so you can compare the assessed value to market value and know if you can benefit from a decline-in-value reassessment.
Your County Assessor has a form for you can fill out to appeal your property’s assessment and apply for a Proposition 8 decline in value reassessment.
UNDER NO CIRCUMSTANCES should you pay anyone to have your property’s value reassessed. Companies that approach you saying they will get your taxes to go down for a small fee are simply taking advantage of your ignorance of the process. Yes, they are providing a service by filling out a form for you that you could’ve got and filled out for free, but its debatable that the fee is appropriate for the service provided.
The Etheridge Team is happy to help get these forms for you absolutely free.
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