PROPERTY TAXES

The Basics:

Property taxes for both residential and commercial properties are an ad valorum (according to value) tax that property owners pay on the value of the property being taxed.  It’s most commonly expressed as a percentage.

For California Real Estate, Proposition 13 states 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 value is determined by the County Tax Assessor and is known as the Assessed Value.   Local service agencies such as water, fire and school districts commonly add their fees as a additional percentage on to the Assessed Value.

Proposition 13 caps the annual increase in the Assessed Value to 2%.  

As a rule of thumb, whenever more than 50% of a property is sold or transferred the property’s value is Reassessed.  There are certain exceptions to this rule such as the California’s “Reassessment Exclusion for Transfers Between Parent and Child”.  Contact Us if you need more information or forms for the Parent-Child Exclusion.

The Challenge:

Property taxes for both commercial and residential have risen more than 10% on average over the past 5 years, according to accounting firm Deloitte & Touche LLC. in large part because rising sale prices for building led to higher tax assessments as strapped local governments look for avenues to raise more money.

The problem for property owners is that now that prices on nearly all properties have fallen drastically nationwide, the Assessed Values or millions of properties reflect values at the peak of the cycle.   The National Taxpayers Union estimates that as much as 60% of taxable properties in the United States are over assessed.

Establishing the Value:

“The art of taxation consists in so plucking the goose to obtain the largest amount of feathers with the least possible amount of hissing.”

-Jean-Baptist Colbert

All property owners have the ability to challenge the Assessor’s opinion of value of their property by providing timely, factual evidence to support a lower valuation.

Tip:  Property owners should diligently monitor their assessments each year and be open to appealing the Assessed Value.  

Nearly half of property owners never appeal their assessed value because they don’t understand the process or they don’t want to do the research necessary.    The good news is that it is not a difficult or overly time consuming process. 

For residential properties the research is very simple.   The first step is to gather recent comparable sales or “comps” and complete a Sales Information Worksheet which is a chart comparing the key characteristics of each home in the neighborhood.

For commercial properties it’s a little more complex but still pretty easy.  Tax assessors use three different approaches to value commercial properties much the same way appraisers do:

  1. the cost approach (the cost to replace the building, less depreciation)
  2. the market approach (recent comps)
  3. the income approach (the building’s net income divided by a capitalization rate of “cap rate” which is simply stated the return rate investors would require for that particular building.)

It’s up to each assessor how to weight each approach in arriving at a value or whether to rely only on one methodology.

Since the real estate market has been so heated since 2001, many assessors have tended to give the market approach more weight.  That could mean that the assessed value of the property is likely inflated due to the declining rents and vacancies typical to a down market.


3 Ways to Reduce Your Property’s Assessed Value:

  1. Request an “Informal Review” by the Assessor.  The Assessor can adjust the assessed value of your property without having to go through the time and trouble of a formal Appeal.  Simply call or write the Assessor.  It’s best to request an information review outside of the peak appeal period which is October through March.
  2. Call and speak with an Appraiser in the Appeal Division.  If you can agree on a value with the Appraiser its possible to “Stipulate to Value” which simply means you come to a written agreement to the value which is effective the next tax year.
  3. Appeal the assessed value of your property.  This is longer and more time consuming than the first two methods and as with all 3 methods you must continue to pay your property taxes during the process.  There are strict time lines dictating when you can file your appeal along with a process that must be followed.  Check the website for your County Assessor for Appeal Workshops if you have not gone through the process before.  Also, consider sitting in on somebody else’s hearing before your appeals date.  You’ll see how the board operates and even more importantly see which arguments will and will not work with the board.

Whichever method you choose make sure to have documents backing up why you feel the assessed value is inaccurate, including income statements and written proof of operating expenses and occupancies.