An Unwanted Surprise from Proposition 13

The dark time of every decreasing property values has ended and there appears to be a light at the end of the tunnel. Recent reports show California home prices in November were up 9.3% from a year ago. Alex Villacorta with Clear Capital says nationwide, home values are up by only 4.6%. He says California’s numbers are more dramatic because the state saw some of the biggest home price declines.

This is good news for property owners but Proposition 13 may hold an unwanted surprise for these same people. First a quick review of what Proposition 13 did in 1978:

Proposition 13 capped, with limited exceptions, ad valorem (Latin for “according to value”) property tax rates at one percent of full cash value at the time of acquisition. Prior to Proposition 13, local jurisdictions independently established their tax rates and the total property tax rate was the composite of the individual rates, with few limitations.

Proposition 13 replaced the practice of annually reassessing property at market value with a system based on cost at acquisition. Prior to Proposition 13, if homes in a neighborhood sold for higher prices, neighboring properties might have been reassessed based on the newly increased area values. Under Prop. 13, the property is assessed for tax purposes only when it changes ownership. As long as the property is not sold, future increases in assessed value are limited to an annual inflation factor of no more than 2%.

The surprise waiting for many homeowners is: Beginning next year, millions of California homeowners will begin to see unexpected increases in their property taxes, well above the 2 percent per year cap set by Proposition 13.

The reason many homeowners will see an accelerated rise in their property tax bills next year is because they were the beneficiaries of reassessments triggered by the plunge in home values that resulted from the 2008 housing market collapse.

County assessors around the state have for the last several years proactively conducted what they call “decline-in-value” reassessments. In cases in which the value dropped below the purchase price — which is the base-year value upon which property taxes are customarily based — taxes were lowered to reflect the lesser value.

Depending on when the owner bought the property, the tax reductions can be significant.
But now the housing curve is moving back up. As their housing values move back up, those homeowners will discover that their property taxes can rise to reflect market conditions — but only until the value of the home returns to the price they paid for it.

Over the next six months, assessors will prepare next year’s property tax valuations. Lots of homeowners could be in for surprises when their bills arrive next fall.

Rising home values in California are great news for the state economy and a blessing for underwater homeowners, but for some they will also trigger an unanticipated tax increase.

* Parts of this post were taken from an article in the Ventura County Star in an article written by Timm Herdt – Herdt: Booby trap for Prop. 13 reformers

About Kevin

Mayor - City of Oakley, Manager of Mainframe Operations and Optimization – USS-POSCO INDUSTRIES, Co-Founder and Board Member - Friends of Oakley A Community Foundation, Commissioner - Contra Costa Transportation Authority, Board Member - Tri Delta Transit, Transplan, San Joaquin Joint Powers Authority and RD 2137, Advisory Board – Opportunity Junction
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