Everyone knows about income taxes, sales taxes, and other more common forms of taxes. However, one of the most commonly misunderstood taxes is real estate tax. This article seeks to give an overview of the important California laws affecting real estate taxes.
California Proposition 13
The current system of California real estate taxes stems from California Proposition 13, which voters passed in 1978. Proposition 13 stated that “the maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.” Additionally, property tax increase was limited to 2% per year.
Proposition 13 was important for three reasons. First, it placed a statewide 1% limitation on real estate property taxes and limited increases to 2% per year. Second, it delegated to the county governments to collect real estate property taxes. Third, property taxes were based on the assessed value of the property.
California Proposition 8
Following the passage of Proposition 13, several issues arose related to the assessment of real estate. Proposition 13 did not give a clear procedure for reassessment of property values during periods of real estate value decline. In response, California Proposition 8 was proposed and passed in November 1978 (Prop 13 was passed June 1978).
California Proposition 8 solved the issue of homeowners having to be liable for increasing property taxes during housing downturns. It created procedures for homeowners to petition the county governments to reassess property value to lower real estate tax liabilities. This obviously came to use during the 2008 housing crisis.
California Proposition 60 / 90
Proposition 13 also had another consequence that was not anticipated. Because property taxes were limited to 1% and limited to 2% increase per year, it essentially stopped people from buying new houses. This became very problematic for elderly citizens that wanted to switch houses during their senior years. Senior citizens that wanted to purchase new property would risk having to be responsible for much higher property taxes, so many people stopped switching homes.
In response, California proposed and passed Proposition 60, which essentially allowed homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home if the replacement home is located in the same county (as long as the new home is equal or lesser value than the original property and purchased within 2 years of the sale of the current property). This meant if you kept your home for a very long time until you turned 55, you had the ability to transfer your low assessed value of your home to a new home without risking increase in property taxes.
Concurrently, with Proposition 60, was Proposition 90, which basically expanded Proposition 60 to include “inter-county” home purchases. Now citizens over the age of 55 are not limited to buying a home in the same county to get the benefits of Proposition 60.
Other California Laws Affecting Property Taxes (Mello-Roos)
Above-mentioned laws are just a few of California laws that affect property taxes in California. While the state limits property taxes to 1% of assessed values, local governments (city and county) still have the ability to add additional property taxes. This is the reason why the average property taxes range from 1.2% to 1.5% of assessed value depending on the location.
The most common type of local tax is called “Mello-Roos.” Because Proposition 13 limited property taxes to 1%, California soon realized there would be a major deficit in funding local governments for public services, especially in new development regions. In response, in 1982, the California Legislature passed the Community Facilities Act (commonly known as Mello-Roos), which allowed the establishment of “Community Facilities Districts” (CFDs). CFDs could seek public financing through the sale of bonds for the purpose of financing public improvement. The repayment of these bonds would then be passed onto homeowners residing in those CFDs. Repayment of bonds typically range from 30-50 years, so homeowners in the CFDs would be paying Mello-Roos for the duration of the bond repayment period.
Homeowners in California need to be aware of property taxes. California has been and continues to be a hot area for real estate purchases. However, with housing prices continuously increasing, new homeowners need to be aware of a large property tax burden.
Eric W. Ching is a real estate attorney with Ching & Seto, a real estate, business, immigration and estate planning law firm in San Diego.