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Piqued at Property Tax Law Increases: Prop 8 & Prop 13 Tax Law Rules and Interplay

Let’s face it – tax law causes Californian home owners to tremble in fear.

And, who can blame them? Tax law is confusing, especially as it relates to real estate tax.

Our tax law practice has shown that failing to plan for how California real property tax law can lead to financial turmoil for home owners.

Prop 13 Tax Law Limits Home Tax Reassessment

The general tax law rule under Proposition 13 is that property taxes due on a home cannot be reassessed more than 2% of its prior year assessed value.

Why, then, did so many California home owners (more than 37,000 in Santa Clara County and 15,000 in Alameda County alone) get property tax increases of more than 2% in the summer of 2012?

Prop 8 and Prop 13 Tax Law Interplay

Tax laws, Proposition 8 and Prop 13, are tightly woven.

Prop 8, passed by voters in 1978, amends Prop 13 and allows a county assessor to recognize declines in property values.                                                              

Decline in property values under Prop 8 tax law are temporary reductions that recognize that the market value of a home as of January 1 has fallen below its current Proposition 13 “factored value.”

Once the market value increases (as of January 1) above the Proposition 13 “factored value,” the assessor will once again enroll the property to its Prop 13 “factored value.”

Rule:  Properties enrolled under Prop 8 are not limited to the 2% limitation imposed on those properties enrolled under Proposition 13.

  • Example:  Suppose Property X (PROPERTY) has a true fair market value (FMV) of $200,000 when purchased in 2000.  One year later in 2001, the PROPERTY has increased in value and now has a FMV of $220,000.00.
    • Under Prop 13, the “factored value” is $204,000.00 ($200,000.00 x 1.02%).  This is the value used for tax assessment.
  • Example:  One year later in 2002, the PROPERTY drops in value to $180,000.00 (an 18% drop). Under Prop 8, the assessor is required to adjust the assessment base to $180,000.00. However, the assessor also maintains a “factored ” basis (tax law term) on the same property under Prop 13.
    • The “factored” value basis is $208,080.00 ($204,000 x 1.02%).  This “basis” is not used, but is maintained for future use if the PROPERTY’s value rebounds.
  • Example:  One year later in 2003, the PROPERTY increases in value to $215,000.00. The factored basis is $212,241.60 ($208,080.00 x 1.02%).
    • Under the tax law, the assessor raises the basis for assessment from $180,000.00 to $212,241.60 (a 17% increase).

Prop 8 “enrollments” of PROPERTY can move up or down by more than 2% per year, whereas Prop 13 is either the current FMV on January 1, or the “factored value” (2% per year), whichever is less.  Tax law provides that when the assessor discovers that the FMV is higher than the Prop 13 “factored” value, the assessor must use the lower Prop 13 value.

Understanding tax law is paramount to a home owners viability – you can appeal the decision if you feel the county tax assessor made a mistake.

About Sean Hanley

Practicing law since 2007, Sean specializes in the ever-changing laws related to real estate, business and estate planning. Embracing technology with a focus on personalized service, he understands the challenges of living and thriving in Silicon Valley. Tapping into his education in economics and business administration, Sean also serves on the non-profit Willow Glen Business Association.

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