In California, property taxes are based on 1% of the fair market value of the property at the time of sale (although there may be some additional fees or taxes, so normally we estimate 1.25% of the sales price "just in case.") Normally fair market value is the same as the sales price, although if somebody grossly overpays or underpays for their property it will almost certainly be reassessed at fair market value regardless of the price paid.
After the base tax value is set, it can go up a maximum of 2% per year (less if the cost of living increase is less.) But what happens if property values go down? Does the property get reassessed at a lower value? The answer is "maybe."
Every May the Santa Clara County assessor's office sends out assessment cards to inform property owners what the assessed value of their property will be for the next tax year (tax year runs from July 1 through June 30.) Santa Clara County (unlike many other counties) is proactive in terms of trying to get the assessed value correct right from the beginning. So, if property values have declined they will try to reassess those properties before mailing out the cards. This year, for example, they have reduced the tax valuation for 42,000 residential homes (about 12% of all condos and 3-4% of all single family homes) in the county, almost all of which are lower priced homes (prices of higher priced homes are still holding steady, for the most part.)
If owners believe the tax value stated on the card is incorrect, they are encouraged to appeal for a reduction in the tax value before June 30 (the end of the current tax year.) Owners may appeal after that date, but they may end up having to pay tax on the higher amount stated on the card for that year and wait up to two years for a refund if their appeal for a lower tax valuation is granted. So don't procrastinate!
Here are a few points to keep in mind:
- Property tax valuation will only be reduced IF the fair market value of the property has dropped to below the tax basis for that property. If you purchased a home for $1,500,000 last year (so tax basis is $1,500,000) and it is now only worth $1,300,000, you almost certainly would be granted a reduced tax basis. But if you purchased your property for $800,000 ten years ago and the basis has increased the full 2% per year allowed in each of those ten years, your tax basis will still only be $975,196 and your property value would have to drop below that amount to qualify for a reassessment;
- The reduced valuation is temporary. If prices go back up again, your tax basis will go back up again;
- As property values start to increase again (and they will!!) reassessments are not limited by the 2% rule until you basis gets back to where it was before, at which time the 2% annual cap is reinstated. So, if there is a dramatic upturn in home values (which seems to happen frequently on the peninsula) it is possible your tax relief may be short lived. Still, nobody likes paying taxes and even temporary relief is welcome.
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• May. 1, 2008 - RE: Property Reassessment in Declining Markets
Dear Mrs. Surber,
I am not sure where you live, but in the CA counties I am familiar with you should contact the County Assessor's Office and ask them what you need to do and if there are specific forms for this. You will probably need to substantiate your claim with information on specific properties that have sold recently in your neighborhood that are similar in size and age and condition to yours. It is easy enough to get some basic information from Zillow or Trulia, or you could contact a real estate agent in your neighborhood and ask them if they would supply some comps. Some agents routinely mail out lists of sales in specific areas and you could start there if you get those. I believe CA law reqired the county assessor to reassess your property down if you can provide substantiating evidence. Some counties (like Santa Clara County) try to do this proactiovely, so you may not even have to ask, but it does vary from county to county. I do wish you good luck. Let me know how it goes!