Property Tax Reductions
For a number of rental property owners, there may be an opportunity to request a property tax reduction if the property value has been over assessed. For the 2012-2013 year, the “open season” to file an appeal asking for an assessment reduction will begin July 2, 2012 and will continue to September 15, or November 30, depending on the local county. In addition, if a supplemental or escape assessment is issued, some rental owners may also benefit by an appeal. Even with recent stabilization in the rental housing market, there may still be opportunities for a property tax reduction, particularly for properties acquired between 2003 and 2009.
This Article outlines property tax reductions in two parts. Part 1, this issue, helps you to understand certain basic property tax rules. Part II, the next issue, covers two of the basic types of appeals, the basics on preparing an appeal and how to value property.
California Proposition 13
To understand the basic rules let’s take a step back in time. Before Proposition 13, in 1978, counties simply met their budget needs by adjusting the county’s annual property tax rate. The board would decide upon the tax rate which would be added to rates/assessments approved by taxpayers. Percentage based rates were multiplied by the county treasurer against a specified percentage of the full cash value, i.e. fair market value, of real property (as computed by the county assessor), and against the county assessor’s indexed class-life value of personal property located within the county. For real property, the full cash value, while adjusted yearly, was formally adjusted by assessors to actual cash value once every four years.
However, in 1978, by public electorate vote, Proposition 13 was adopted in California. This changed how all county assessors compute the assessed value of real property subject to property tax. For property acquired prior to March 1, 1975, Proposition 13 rolled back the assessed value to the amount shown on the 1975-76 assessment roll (i.e., the base-year value). The Proposition limited further the assessor’s annual change to the base-year value to the lesser of CPI or 2 percent per year. The assessed value may decrease if CPI is negative.
In addition, the base year value would not be reset to fair market value until a change in ownership or new construction occurred. A change in ownership could arise from a change in owners holding title. It may also occur from a change in entity control. For example, a change in entity control will occur when either (a) an individual gains a controlling interest (i.e., a greater than 50 percent interest) in a legal entity or, (b) after the proportionate transfer exemption is used, a majority (i.e., greater than 50 percent) of the original owners transfer their interests. A 100 percent reassessment of the entity held property will then occur. While in some cases careful planning may avoid or reduce the likelihood of a reassessment for family succession planning with real estate, for better or worse, a typical sale of real property will cause a valuation reassessment for property tax purposes.
A reassessment can also occur with new construction as to just the improvement itself. New construction may include either the construction of a new structure or a major remodel.
In addition to the foregoing new rules, Proposition 13 limited the county’s tax rate to 1 percent of the assessed value plus preexisting special assessments to pay for voted indebtedness. Assessments for new indebtedness required a two-thirds voter approval.
Shortly after the enactment of Proposition 13, Proposition 8 was approved. Proposition 8 corrected an oversight and allowed assessed values to be temporarily reduced for declines in property values. If fair market value declines below the property’s base year value, regardless of cause, the assessed value for tax purposes is reduced. These reductions are computed annually as of the January 1 annual assessment lien date. Proposition 8 may be based on market value declines.
The Value of an Appeal
As discussed more fully in Part II, there are situations where requesting a reduction in the assessed value by way of a tax appeal makes sense. There are two more common types of appeals. A Proposition 13 base-year value appeal challenges the original base-year value. The base-year value can be corrected for an error made in a new construction reassessment or a reassessment due to in a change in ownership within the past four years. A Proposition 8 appeal challenges the assessed value if the actual property value has declined below the property’s base-year value. As described more fully in Part II, this decline may be proven under several alternative ways. Part II will be covered next month.