Are you a homeowner who dreads your annual property tax bill? The amount due increases each year, the bill doesn’t disappear in retirement (unlike paying off your mortgage), and it requires two lump sum payments (which can be substantial). This post will provide you with a basic understanding of California property tax, along with some information which might help save you money.
Property tax on your home is a way for local governments to raise funds for schools, fire and police departments and other public services. Since the passage of Prop 13 in 1978, the property tax for the state of California is capped at 1% of assessed value of home and land (based on purchase price). The assessed value on your property is increased annually, up to 2% each year or at the rate of inflation, whichever is lower.
So, if you buy a home in San Francisco for $800,000 this year, the base property tax will be $8000. In the following year, with a 2% increase in the property value (to $816,000), the base tax will increase to $8160. The good news is that even though your home may increase in value faster than the rate of inflation, your property tax increase is capped at 2% annually.
In addition to the base property tax, you might see additional charges for voter-approved bonds. This year, for the city of San Francisco, there are three additional assessments related to the San Francisco school system.
Property tax is deductible for those who itemize deductions, at both the federal and state level, which can result in substantial savings.
Tip for homebuyers: The additional charges imposed by municipalities (for schools, etc.) vary among cities, counties. You should check with your realtor about the specific property tax bill for the home you are preparing to buy, and factor those expenses into your budget.
Planning for Property Tax Payments
When you first buy your home, the bank holding your mortgage may create an impound account for you, where you will make monthly payments for homeowner insurance and property tax. The good news for you is there is no planning required on your part to save for these bills. However, the bank is collecting money from you before bills are due, so there is an opportunity cost. You might have been able to invest that money until property tax and insurance payments are due.
You can create your own impound account by making monthly contributions to an account (with decent yield) dedicated to saving for property tax.
What Triggers Reassessment of Property Value?
- Sale of property- will lead to new assessment based on sale price
- Certain home improvements – for example, adding a new bathroom (good discussion on Board of Equalization website)
- Drop in property values – you can petition for a reassessment, as discussed in this article on SFGate
Impact of Prop 13 on You as a Long-Term Homeowner
Let’s say you bought a home 20 years ago for $268,000, and it is currently valued at $815,000. Your initial base property tax was $2680, and it is now currently $3267 (assuming 2% annual increase allowed by Prop 13).
If you wanted to sell your current home, and buy another home in San Francisco for $1,000,000, the base property tax will increase from $3267 for home held for 20 years to $10,0000 for the new home. This may be an important consideration for you if you are thinking about selling/buying a new home as you near retirement.
This amendment allows homeowners over age 55 to transfer their property tax base from original home to new home, with a number of stipulations. These rules include but are not limited to:
- Original property must have been the principal residence
- The new property must be purchased or built within two years of the sale of the original property
- OK, quoting from “Hamlet”, “there’s the rub”: The new property must be equal or lesser in value to the original property.
There is much more to this, but you get the idea. For a fuller discussion of Prop 60 (and related Prop 90), please refer to this article from Board of Equalization.
Events That Do not Trigger Property Reassessment
Not every transfer of property will lead to a new property assessment, with a corresponding increase in property tax.
Exceptions include, but are not limited to:
- transfers between spouses (divorce, death)
- transfers between parent-child
Just as for prop 60, there are many restrictions for such transfers.
For many of you, your home is a substantial part of your net worth. And property tax bills are a significant annual payment. Informed planning may help save you a lot of money.
Disclosure: Please consult with a knowledgeable real estate attorney before planning any transaction based on the information discussed in this post.