Now that income taxes are done, it is property tax season. Starting in July, property owners will begin receiving their bills for the 2012-2013 tax year. I'll review how property taxes work in California with a focus on homeowners and Proposition 13, which is the basis for valuing and assessing real property.
The concept is simple: property tax is equal to the taxable value multiplied by the tax rate.
The tax rate is not too tricky; it starts at 1 percent. Then you add various local charges, including bond measures which were approved by the voters, and Mello Roos. Some counties may also collect other special assessments through the property tax bill.
In Fountain Valley, for example, the total rate ranges from 1.05024 percent to 1.06726 percent (according to the tax rate book for 2012-2013), and then there are "supplemental assessments" such as the OCSD sewer user fee. If you are curious, you can view copies of recent property tax bills on the Orange County Assessor website by typing in an address.
The taxable value is where things get complicated. The taxable value is equal to the assessed value minus exemptions. For example, there is a $7,000 homeowner exemption for owner-occupied homes. Also, property owned by churches and certain nonprofits can be exempt from property tax.
The assessed value starts as the purchase price of the property when it was purchased (or construction cost if self-constructed), then the assessed value is recomputed each year by the county assessor's office.
In some states, the assessed value each year is adjusted to the estimated market value of the property. Also, the property tax rates can vary from year to year, which causes large fluctuations in the property tax bills. California had a similar system prior to Proposition 13.
In 1978, California passed Proposition 13, which limited the property tax rate to 1 percent plus the rate necessary to fund local voter-approved bond indebtedness, and stated that annual increases in the assessed value cannot exceed 2%, unless a property undergoes a change in ownership or new construction.
So now, your assessed value should be the lower of (1) your purchase price plus new construction plus annual increase of no more than 2 percent per year or (2) the market value as of Jan. 1 of the current year.
If you purchased your home during the recent real estate bubble, you should check your property tax bill to see if the assessed value is correct. If the bill shows an assessed value, which is higher than the market value, then you can contact the county assessor and appeal for a lower value. For example, if your home value has dropped by $100,000 since you purchased it, then your property tax bill should also decrease by 1 percent or $1,000 plus the other charges which are linked to your value. If you act before April 30, you can do a "request for informal review" which is available on the assessor's website at ocgov.com. If you are still not satisfied with the assessed value, you can file a formal appeal.
As noted above, a property can be reassessed to current value upon a "change in ownership." However, there are certain important exceptions to this rule, particularly between family members. The purchase or transfer of a principal residence and the first $1 million of other real property between parents and children (for example, upon the death of the parent) is not subject to reassessment. You must file a form with the county assessor to claim this exclusion, otherwise the property may be reassessed.
For additional information, you can also consult publication 29 and 30 by the State Board of Equalization at boe.ca.gov
Patrick Harper, CPA, a Fountain Valley resident, is a partner with Harper & Harper Tax and Accounting Services. Contact him at 714-274-9387 or email@example.com.
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