How Does California Property Tax Work?

In California, we approved Prop 13 in the year 1978. This set the tax assessed by the County in which the property is located at 1% of the “assessed” value, with a built in maximum increase of 2% per year. And in some places where it is permitted (typically in newer communities) Mello–Roos (Community Facilities Districts or “CFDs”) taxes, and assessments.

The process for determining a property’s taxable value is found in the State Constitution. With a few exceptions, a property’s assessed value is equal to its purchase price (but based on the assessor’s own valuation, not on the actual purchase price) adjusted upward each year by a maximum of 2% per year. The California Constitution states that other taxes and charges can’t be based on the property’s value. This is a great contrast from places like New York where the property tax can be $30,000 – $40,000 per year because it is designed to fund the local public schools directly.

In California, “real property” is defined as the possession of, claim to, ownership of, or right to the possession of land.” This includes mines, minerals, and quarries, as well as standing timber, and “all pertinent rights and privileges.”

Improvements are also part of real property. These are “buildings, structures, fixtures, and fences erected on or affixed to the land,” along with all fruit, nut-bearing, or ornamental trees and vines (except date palms under eight years old).

Real property is taxable in the county where it’s located, regardless of where the owner lives. If real property stretches into more than one revenue district, the part in each district is taxable in that district.

In 1978, California voters passed Proposition 8, a constitutional amendment that permits a temporary reduction in assessed value when real property suffers a decline in value. A decline in value happens when the current market value of real property is less than the current assessed (taxable) factored base year value as of the lien date (January 1st). This was used to a great extent again in 2008-2011 after the real property crashed in the deepest recession since the Great Depression. Now, the Assessor’s office is playing catch up again by raising the tax 2% o the new reduced assessed rate annually, as seen on your real property tax bill.

The determination of a decline in real property value is made by the county assessor. This is in addition to the formal appeal process with the county assessment appeals board that’s available to taxpayers.

When making a claim for a temporary decline in value, you should give the assessor any information that supports your contention that the market value for your property is less than the assessed value. The best support is information on sales of comparable properties in your neighborhood (often called “comps”). It’s best to find two comps that sold as near to the January 1st lien date as possible (but no later than March 31st).

There are three county departments involved in the property bill process.

The County Assessor’s Office deals with assessed values, exemptions, and exclusions. This entails locating taxable property in the county and identifying ownership; and establishing a taxable value for all property subject to property taxation.

The Assessor also applies legal exemptions and completes an assessment roll with the assessed values of all property. This assessment roll is delivered to the County Auditor-Controller, who oversees computing the property tax and the tax rates. This office also apportions and distributes the property tax monies collected to the various entities.

Finally, the Tax Collector collects the current year payments or prior year delinquencies and has copies of your tax bill. This office mails the tax bills and collects the amount due that was computed by the Auditor-Controller.

Real property tax reassessments can occur upon transfers, including transfers by gift, unless they are exempt. This means that a property which is owned in a business entity, a trust or by individuals can be-reassessed to modern day values and boost revenues to the County substantially upon transfer. There are exemptions from re-assessemnt including Parent-Child Transfers and in some cases Grandparent-Grandchild Transfers. Business entities can withstand a change of ownership from the original owners (not greater than 50%) before the entire property is re-assessed. These key exemptions should be the basis of any plans to hold, transfer, sell or improve your real property in California. Good property tax planning can ensure sustained cash-flow for years to come if plans are made with property tax rules in mind.

As you can see, property tax is a complex subject, and you should have qualified legal counsel. If you have questions or a dispute about your property taxes, you are best served by working with an experienced property tax attorney. Contact NM Law, APC (949-253-0000) to speak to an experienced real property tax attorney about your property and your property taxes.

Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.