In 1978, the State of California passed Proposition 13, a measure designed to limit property taxes after a series of rate hikes and a then-reported surplus in state taxes at the time. Proposition 13 lowered the property tax rate to one percent and placed a cap on future property tax increases. How does Prop 13 affect homeowners and home buyers in Orange County?
Understanding Proposition 13: A Brief History
Before the passage of Proposition 13, the State of California had at one time earned nearly 70% of its revenue from the collection of property taxes.
The State of California itself does not collect property taxes except on privately owned railroad cars. That has been true since 1933. Some might read the above and assume no property taxes are levied at all. Is this true?
No. Just because the state doesn’t collect these taxes, that does not mean you won’t pay them; it just means you don’t pay them to the State of California. Instead, local governments collect the tax to pay for the operation of city or county operations, schools, and “special districts”. These taxes amounted to well over $60 billion in the 2016-2017 tax year alone.
In 1978, Proposition 13 lowered local real estate assessments down to 1975 value levels. It also restricted the OC property tax rate to 1 percent plus the amount needed to fund local voter-approved bonds.
A cap on future tax increases was also included. The transition was a rocky one; county tax revenues dropped sharply in the two years following Prop 13 and financial bailout programs were needed to get local governments more fully funded.
How Proposition 13 Works In Orange County
Under the old system, property values were reviewed frequently to ensure they were listed at or near current market values. These reviews ideally happened once every five years, plenty of time to reflect on changing market conditions or other variables.
But Proposition 13 changed that to what some call an “acquisition-based system”. That means the value of a home isn’t updated or re-evaluated for tax purposes until the owner sells the property or upon the completion of a new construction project.
Proposition 13 features an annual increase cap–it cannot increase more than two percent in typical cases unless the property changes owners or there is new construction.
The Proposition 13 Process
If you sell a home or there is a “partial change in ownership”, the house must be re-assessed to determine the current fair market value. This is listed as being current on the date of transfer of ownership. When this happens, a “base year” is established for the property that is used to calculate your property taxes, current as of the date of transfer.
This has implications for those who have owned an Orange County home for a long time because the amount of property taxes you paid on a home you bought in 1980 will likely be higher in 2022 if you buy a new house. Can you afford the increase?
If there is a partial change in ownership, the base year is changed only for the new owner–the old owner retains the original base year value (the property value assigned when the house was originally purchased) does not change. You read that correctly–property tax liability is assessed differently for the original owner than for the owner added to the title later on.
How Proposition 13 Tax Limits Work
Under Prop 13, changes to the assessed value of an Orange County property is limited; it can increase by no more than two percent per year unless a change in ownership or new construction are factors.
The two percent increase is applied to the base year value, described by OC government websites as “the factored base year value” which is the upper limit for property taxes. The maximum two percent increase per year is added until a change in ownership or the addition of new construction.
Prop 13 Rules For New Construction
If you own property and add new construction to it, the property is reassessed and assigned an updated market value at the end of the construction. However, similar to the rules for adding a new owner mentioned above, the new assessment may be for the newly built improvements–nothing more.
Were the improvements an addition? Or did the project result in an entirely new structure? Valuation depends greatly on these details and you may find in some cases the new structure is valued but the original base year value for an improvement is treated differently.
If the above sounds a bit confusing, that’s because these details involve legal definitions of certain circumstances that trigger an assessment of improvements or additions-what applies for one doesn’t necessarily hold for the other.
You will need to discuss a renovation project with an assessor’s office to determine what your potential property tax liability may be depending on whether the improvement is an addition or something more extensive.
Property Tax Nuances
It should be mentioned that the issues we are discussing here pertain to real estate and not necessarily to other types of property like hose boats, planes, RVs, or similar property. A houseboat or RV cannot be taxed as real property and cannot be fixed to a permanent foundation. The tax rules for boats, planes, etc. may include an annual appraisal and assessment.
Because of Proposition 13, it is possible to pay more in property taxes for a home purchased recently than for a home purchased years ago.
If two homes are comparable and would assess for the same rate, it may be possible to avoid paying more in property taxes in the current day simply by not selling, transferring, or significantly improving the property. Does that mean your home is not worth the same as others in the market?
An appraisal (different than an assessment) would be required to establish the fair market value of your property today compared to when you purchased it. You would use the appraised value of the home or an estimate of it to establish the sale price–not necessarily the assessed value used to calculate your property tax.