What does California’s Proposition 13 mean for me?
| There seems to be some confusion about California’s Proposition 13. I’ve heard buyers and new homeowners make comments like, “it’s too bad I can’t take advantage of Proposition 13,” when in fact, they can and will. What is Proposition 13? Passed by voters in June 1978, Proposition 13 states that real property (real estate) has a restricted rate of property tax increase of no more than 2% each year, unless there is a change in ownership (there are some exceptions, of course) or if there is new construction, such as an addition or an ADU on the property. The restricted 2% allows homeowners to plan their budgets accordingly as property values increase, with some caveats. Once the assessed value of the property is established, the property tax can increase by no more than 2% per year. However, if values decreased and a lower assessment was granted (like during the 2008 recession) and then increased later on, the assessor could snap the value back up to a 2% annualized baseline increase. Here’s a simple example: let’s assume a property was assessed at a value of $1 million. In 2008, the value of the home decreased to $950,000 and the owner was granted that market value assessment. As values began to increase following the recession, the property was then valued at $1.1 million. At that time, the 2% property tax increase could be based on the previous baseline value of $1 million, rather than the $950,000. Another key component of Proposition 13 is that property tax is limited to 1% of a property’s value. However, cities and counties can also add portions of voter approved taxes such as school bonds, sewer district improvements, water management, city parks, etc. on top of that 1%. In Santa Clara County, the average is about 1.25% per household, but can change slightly from one neighborhood to the next. Generally, a new baseline tax assessment is established when ownership is transferred. For example, if someone bought their house for $1 million one year, and the market continued to increase substantially for five years, their taxes likely would’ve increased 2% per year for each of those five years they owned it. If my math is correct, that 2% increase each year would put the assessment at approximately $1.104 million after five years. When the property is sold for $1.8M, the new owner’s assessment would be $1.8 million and their annual tax liability would be approximately $22,500 per year. There are some exceptions to having a property reassessed when ownership transfers. For example, when an owner transfers the property to or from their family trust, or parent-to-child and child-to-parent transfers. I think new owners feel excluded from the benefits of Proposition 13 when they’re paying relatively high property taxes and a nearby neighbor who purchased a home 40 or 50 years ago is paying much less. But 40 or 50 years from now, new owners will be looking at today’s homeowners feeling the same way. If we continue to see exponential growth in property values, the equities (or inequities, depending on how you look at it) will be similar then as it is now. Overall, Proposition 13 is a good thing that will save you money in the long run, even if you don’t quite feel the benefits today! As always, real estate professionals are not allowed to provide tax advice. To learn more about how this and other propositions apply to your personal circumstances, please seek advice from an appropriate professional. |
