Prop. 8 May Help

Down and Out

Property Owners

If value has slid, tax code may provide relief

By Timothy S. Williams

 

Real estate values — particularly in the residential market —

are down in California and across the country as a result of

the ongoing subprime credit crisis, among other factors. If

you own property, this is generally bad news. But there could be a silver

lining — the opportunity to reduce your property taxes.

 

While assessors have the power to act on their own to reduce assessments when property values decline, they generally do not. So it is up to the property owner to request the reduction.

 

Under California’s Proposition 13 property tax rules, property is reassessed

at its fair market value when it is sold or undergoes some other

form of change in ownership. Because property values in California

have generally appreciated in value over the nearly 30 years since Proposition

13 was passed in 1978, a change in ownership usually means that

property will be reassessed at a higher value than its previous assessed

valuation. However, there is a provision of California law (often referred

to as Proposition 8 after the statewide proposition under which it was

enacted) that should not be overlooked, particularly in a down market

like the one we are now experiencing.

Property is assessed at the lesser of its factored base year value or its

current fair market value. !e factored base year value is the property’s

assessed value established at the most recent change in ownership, and

it is increased by a 2 percent annual inflationary adjustment. If you have

owned your property for an extended period of time, the factored base

year value of the property will generally be lower than its current fair

market value because property values in California have historically appreciated

by much more than 2 percent per year. But if you acquired

property more recently, the recent drop in real estate values may have

pushed the fair market value of your property below its assessed value.

If that is the case, you have the right to request the reduction of the assessed

value of your property to its fair market value. Here are some of

the key elements of this provision as outlined in Proposition 8:

!e property owner must initiate the reassessment. While assessors

have the power to act on their own to reduce assessments

when property values decline, they generally do not. So,

it is up to the property owner to request the reduction.

Value is determined as of Jan. 1 of each year. For purposes of

determining whether there has been a decline in a property’s

value for property tax purposes, it is the value of the property

as of Jan. 1 (the lien date) that is important. For example, if the

property was purchased for $500,000 in February of 2007 and

it declined in value to $450,000 as of Jan. 1, 2008, it is eligible

for Proposition 8 relief. But if the property was purchased on

Feb. 1, 2007 for $500,000 and its value had fallen to $450,000

on Sept. 1 but recovered to $510,000 by Jan. 1, 2008, it would

not be eligible for a reduction.

!e rule applies to both residential and commercial properties.

Although the residential real estate market has so far

been impacted more than the commercial market by current

economic conditions, Proposition 8 is equally available to

residential and commercial property owners.

Many California counties have their own forms and procedures

for requesting Proposition 8 reductions, and the submission

deadlines vary from county to county. Typically, a

request should be submitted to the assessor as soon as possible

after the Jan. 1 lien date for which the reduction is being

requested. If the request is rejected or if no response is

received, the property owner’s claim for a reduction can be

preserved by filing a formal Application for Changed Assessment

with the County’s Assessment Appeals Board within

the applicable filing period (which is either Jul. 2 to Sept. 15

or Jul. 2 to Nov. 30, depending on the county).

If Proposition 8 relief is granted, the assessor will review the

valuation as of each subsequent January 1 and will notify the

property owner of its determination. If the fair market value

of the property has increased, the assessor will reassess the

property at that value as long as it does not exceed the property’s

factored base year value. For example, if a property was

purchased on Jan. 1, 2005 for $500,000, its factored base year

values for subsequent years would be as follows (assuming a

2 percent inflation factor for each year):

1/1/2006 $510,000

1/1/2007 $520,200

1/1/2008 $530,604

1/1/2009 $541,216

1/1/2010 $552,040

1/1/2011 $563,081

Assume that, as the result of a Proposition 8 claim, the assessed

value is reduced to $520,000 as of the Jan. 1, 2008 lien date and that

the fair market value (and the assessed value) remains at $520,000 as

of Jan. 1, 2009, but rebounds to $550,000 as of Jan. 1, 2010. !e assessed

value as of Jan. 1, 2010 would be increased to $550,000. !is

5.8 percent increase would be permitted under Proposition 8 even

though it is more than the 2 percent annual limit under Proposition

13, because the 2010 assessed value is still below the base year factored

value for that year. If the fair market value as of Jan. 1, 2011 increases

to $565,000, the assessed value would be capped at the factored base

year value of $563,081, and the property would no longer fall under

Proposition 8 rules.

The woes of the current market conditions are reaching and have

affected numerous property buyers across the country. Fortunately,

there may be a way to make that hardship more bearable for California

property owners, and a careful analysis of each market’s circumstances

should be conducted for possible property tax relief.


John K. Emery, CREA 350 Victoria Street San Francisco, CA 94132
Phone: Fax:

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