Prop. 8 May Help
Down and Out
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):
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.