How Property Taxes Work
Being a homeowner comes with many benefits—building financial equity, taking advantage of some income tax breaks, and tailoring your living space to reflect your style and needs. It also comes with some expenses, property taxes among them. Here’s a primer on how property taxes are assessed, how they can change, and how California’s Proposition 13 affects the whole situation.
The money you pay in property taxes is based on two things: the assessed value of your property and the tax rate for your area. The assessed value is based on the fair market value of your property when you bought it, which is often the purchase price. Thanks to Proposition 13, increases for inflation are capped at two percent a year.
If property values drop, you can have your home re-assessed and the fair market value adjusted downward, thereby reducing your property taxes. If you ask the County Assessor’s Office to re-calculate the fair market value of your home, but you feel the assessment is still too high, you can appeal the decision to the Property Tax Appeals Board.
The Appeals Board is made up of six citizens, most of whom have been affiliated with the real estate industry for many years. I’m currently the board chair, and I can tell you, all of the folks I serve with are held in high regard for their integrity and knowledge.
When a property changes hands, the value of the property is reassessed, unless it is a rare exception to the “reassessment on transfer” rule. The most common exception is when parents transfer the title of the home to their children.
The tax rate in Mendocino County is based on one percent of the fair market value plus any approved special taxes. Typically, the tax rate is 1.1 – 1.2 percent total. So, if you plan to buy a home, you’ll need to budget about a tenth of a percent of the purchase price for property tax per month (e.g., if you buy a home for $450,000, you’ll owe about $450 per month). Taxes are due twice a year and they come with a hefty late fee, so be sure to pay attention to the due date.
The reason taxes cannot go up more than two percent a year is because of Proposition 13, passed in 1978 under the title, the People's Initiative to Limit Property Taxation. Before Proposition 13, California counties would estimate their budget expenses for the year, deduct anticipated revenues, and then divide the remaining shortfall by the assessed value of all of the properties in the county. Property owners were expected to make up the shortfall. As you can imagine, this resulted in property tax rates many times higher than they are today.
These days, the only way for your property taxes to go up more than two percent (if you don’t buy or sell a property) is if you complete home improvements that increase the assessed value of your home. Even then, the assessor can only increase the fair market value on the improvement, not on the whole property.
Sometimes elected leaders whisper about changing Property 13, but recommending the wholesale repeal of Prop. 13 would be political suicide. Politicians know balancing the budget on the backs of home owners (who make up a disproportionate percentage of voters) would be a very unpopular approach. If not increasing all property taxes more than two percent, some have quietly suggested that business and commercial real estate be taxed more. The truth is that commercial property owners are likely to pass on any increases in property taxes to their customers. Part of the cost of the bread and milk you buy at the grocery store pays for the property taxes on the grocery store dairy and bakery properties. If Proposition 13 ever changes, we will all end up paying (homeowner or not).
And finally a reminder: if you’re looking for something fun to do in Ukiah, check out visitukiah.com. Pumpkinfest will be held in Downtown Ukiah Oct. 17-19.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.
