#2 of 14 Things Buyers Should Know About Property Taxes: Expect a Supplemental Tax Bill

So here's part II of the 14 Things a Buyer Should Know About Property taxes. Click here to link back to the summary list of the 14 items.

2. Expect a supplemental tax bill

A large portion, if not all, of your property tax amount is calculated on the property’s “assessed value”. The seller’s assessed value started as his purchase price. Thanks to Howard Jarvis and Proposition 13, there are restrictions on how much the county assessor can estimate the property’s appreciation for the purpose of tax assessment (another good reason not to sell properties if you don’t have to when buying up). So while the seller’s property may have appreciated 25% while he owned it, his assessed value may only be 7% above what he paid. In real numbers, maybe the seller bought the property for $500,000 and now it’s worth $625,000, but the tax collector calculates the property tax based on $530,450.

When you come along and buy the property for $625k, it takes the tax assessor’s office quite some time – sometimes six months or more – to get around to reassessing your property at the new value. In the meantime, the tax collector doesn’t realize the property has changed hands and does not realize he can “restart” the property’s value at your purchase price (once again subject to the Proposition 13 restrictions going forward). Until the reassessment, the taxes will be calculated based on the OLD and thus WRONG value.

No matter what, not even if it takes the government 10 years to get around to assessing your property, you owe the amount based on the new value. The difference that accumulates is called a “supplemental” amount, and you will get a bill for that amount shortly after the reassessment. The bill will come with its own deadline, completely unrelated to the regular April 10 and December 10 deadlines, and you must pay the supplement by the deadline. Period.

Don’t be surprised when the bill comes. Don’t be surprised that the amount is calculated based on the new value. Consider yourself lucky that your property is not in New Jersey, where the property tax rates are roughly FOUR TIMES what they are in OC (see rule #12), and just pay it. Try to stay positive. Keep in mind how much interest you are writing off on your income taxes and - with any luck - how much your property is appreciating, and just realize taxes are a cost of your investment. (See your CPA about whether or not your property tax amount is another deduction against your taxable income.) Remember to vote (see rule #13)… y’know, YOU are “the rich” now, you wealthy property owner!