What are property taxes?
Property taxes are an ad valorem tax based on the assessed value of real estate multiplied by a specified tax rate. They can be taxes on land, buildings and other forms of property and paid by the property owner. These taxes are collected by local governments. These monies are shared with the local governments and the state to pay for roads, schools and other government projects.
If you have never owned a home before, you may be unfamiliar with property taxes. However, homeowners quickly learn that property taxes are a significant expense of owning a home. In the United States, the median property tax bill is $2,350 per year. In California, the median property tax bill is $3,550 per year, roughly 30% higher than the national number.
How are property taxes calculated?
Taxes are based on “assessed value”. How your assessed value is calculated varies from state to state and is often different, than the actual “market value”. Market value is a sale price determined by a knowledgeable buyer and a knowledgeable seller, neither one taking advantage of the other, also known as an “arms length transaction”.
In California, your local county Tax Assessor sets the assessed value whenever ownership is transferred, or when permits are pulled for new construction in your home. While normal maintenance is not considered new construction, additions or a complete rebuilding of your home would trigger a new assessment.
In most states, your local county determines how much to charge for property taxes. The amount of the tax is a percentage of your home’s estimated value. For example, in California, property taxes are 1% of your home’s assessed value. However, special fees and bonds voted on by the voters may actually increase the amount you pay in property taxes. In many California counties, the percentage is closer to 1.1% after special fees are added.
California Proposition 13 affect on property taxes
As previously mentioned, the percentage the county can charge in property taxes is determined by the state or county. The problem with this model is that in areas with rising home values, property taxes can substantially increase and become unpredictable from year to year. For Californians, this was a particular painful problem for retirees and seniors, until Proposition 13.
In 1978 California voters passed Proposition 13. Proposition 13 states “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.” It’s not just the limit of 1% of full value that protects homeowners. The real protection for homeowners is protection from rapidly increasing property taxes. The proposition states the county is prevented from increasing the property’s value more than 2% in any given year. The exception, is when property is transferred to a new owner. When this happens, the value is reassessed based on the current market value of the home.
Because of Prop 13, homeowners are protected from massive increases in their property taxes in the event that their homes’ values increase significantly. This has protected homeowners from the large swings in property taxes that other states are subject to.
Sadly, there are legislators who can’t balance a budget, who regularly attempt to circumvent this voter initiative.
How do I dispute a property tax bill?
How your property’s home value is determined
When property ownership is transferred in California, a Preliminary Change of Ownership Report (PCOR) must be filed with your local county tax assessor. This form is typically completed as part of the paperwork given to you by your title company or attorney. This informs your local county tax assessor that they are to perform a new property tax assessment. Remember, Prop 13 prevented them from increasing your property taxes by more than 2% for any given year except when a property is transferred.
Each county has their own internal property appraisers. However, they are not required to be a licensed appraiser that you might use when you get a loan. The counties appraisers are certified by the state, and follow similar appraisal practices. However, they may have their own guidelines governed by your state and county. Therefore, you may find the value the county assessed for your property, considerably different from what a licensed appraiser may estimate your property’s value. Even so, the county appraisal should be within 5% of a traditional appraiser. If not, either the bank or county appraiser should be able to explain the differences in valuation.
The property tax appraisal process
After the sale of your property, the county assessor is supposed to drive by your property and assess the condition. Then they are supposed to choose similar sales in your neighborhood. These sales must be arms length transactions. That means auctions, private or inter-family sales are ignored. Only sales sold through a Realtor® on the Multiple Listing Service are considered acceptable comparables. You can’t lower your property’s tax assessment by equating it to the REO tear down house in the neighborhood.
However, it has been our experience that these assessors often do not actually drive by your house to see the condition. Due to time and workload, they may just assume it’s in good condition. If they do drive by, it may be months after the sale, after you have spent significant dollars upgrading the property.
This can result in wildly over valued appraisals if you purchased your home in poor condition. We’ve seen houses appraise for $25,000 over the purchase price, that needed significant repairs when we purchased them. Then after we put $50,000 into repairs to resell the house, the county assessed the value at $25,000 less than we paid for the property four months earlier!
How to challenge your county’s valuation
If you feel your property’s home valuation is significantly inflated, you may consider appealing the valuation. The process will be different for different states. The process below is California specific.
Preliminary Change of Ownership Report
In California, your first opportunity is at the time of purchase. It’s important to pay attention to the Preliminary Change of Ownership form that you complete at closing. Under the condition of the property, you have the opportunity to describe the condition of the property. It’s not sufficient to simply choose Fair or Poor. You must describe any significant defects that might affect the appraisal.
After the county has done their assessment, they will issue an additional assessment notice stating what they have assessed your home’s value at. Then, if you disagree with their evaluation, you can go to your local county tax assessor’s office and meet with the person who did the appraisal.
What you need as evidence to challenge
You will need to provide proof that the home was not just dated, but that key items were non functional. For instance, you may have photos showing that the roof or decks needed replaced. Having an old hot water heater or dated kitchen and baths will not make a difference. You must demonstrate non usable condition of key components of your home.
If you have photographs or copies of permits that you have for the work done, that will go a long way toward you cause. Most appraisers I’ve spoken to at the county can be reasoned with if you provide evidence of non usability.
If you and the tax assessor cannot come to an agreement, you may appeal the appraisal to your County Assessment Appeals Board. Appeal dates and time lines vary from state to state. In California, there are specific dates and deadlines identified in any reappraisal notification.
Interesting Note: During the Recession, property tax assessed values actually went down for many homeowners. While Proposition 13 limits significant increases in your taxes, it has not provision for decreasing home values like we saw in the Recession. It was Proposition 8 that allowed for the assessed value to be reduced due to market fluctuations.
How to pay your property tax bill
Property tax bills may come either annually, semi annually or in smaller installments. Property taxes are paid bi annually in California. Some states have grace periods, but in California there is no grace period. Property taxes are delinquent if not paid by December 10 and April 10. The good news is that most county offices now allow you to pay your property taxes online. Simply go to your local county’s website and search for “property tax” or “tax collector”. Here’s a complete list of California county tax collector offices.
What happens if you don’t pay your property taxes?
There can be serious consequences if you don’t pay your property taxes. First, the penalties for late payment can be quite steep. In California, the penalty for late payment of your property taxes is 10% of the amount due. Each successive missed payment penalty is added to the previous amount. If left unpaid, there is an additional 10% penalty every six months for any unpaid penalties and amounts. To make matters worse, payments apply toward penalties first, and then your property tax amount.
Property tax sales
If your property taxes are not eventually paid, your home may be sold at a tax sale auction. At the auction, the county tax collector will auction off your property to the highest bidder, with the bid normally opening at what is owed in back taxes. The winning bidder becomes the new legal owner of the property. Different states may have different amounts of time before a property can be sold at auction.
In California, if you have an outstanding balance for five years or more, the county can hold a tax sale auction and sell your home to the highest bidder. These sales typically are listed on your county’s website and happen once or twice a year.
How to stop a property tax sale in California
In California, to prevent your home from being sold at a property tax sale, all outstanding amounts owed must be paid by 5:00 pm the business day before the scheduled tax sale. Penalties are paid first, and then whatever taxes are owed.
Tax lien sales
In some states, a tax lien rather than the home is sold at auction. Unlike a tax sale where the buyer bids on what they are willing to pay for the property, a tax lien buyer bids on what interest rate they are willing to accept from the owner. The buyer willing to accept the lowest interest rate, wins the bid. The tax lien buyer pays the taxes owed, and receives a tax lien that is placed against the owner’s home.
With a tax lien, the homeowner becomes responsible for paying the buyer of the tax deed the amount owed plus interest. These tax deeds come at a hefty interest charge, typically between 10-12%, but can be as much as 30% in some cases. Investors and hedge funds buy up tax deeds because of the high profit returns. Buying tax liens is a big business and in 2017, roughly $4 billion dollars in tax liens were purchased by private investors according to Jim Westover of the National Tax Lien Association.
Don’t assume you can continue to not pay your property taxes just because you live in a tax lien state. If the tax deed along with any interest is not paid back within a prescribed time frame, the owner of the tax lien may foreclose upon your home. Typically you have one to three years to pay back the investor before they can foreclose on your home.
Tax lien states
The following states are tax lien states: Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming.
Can I redeem my house after a property tax sale?
In California, you can redeem your house by paying the property taxes in full up until 5:00 pm of the last business day before the property tax auction. In tax lien states, you can redeem your house by paying the buyer of the tax lien all amounts due within six months to four years. You can see a complete list of redemption periods and interest rates here.
Consequences of not paying your property taxes in California
Bank may foreclose
If you have a bank loan on your home, your lender has a vested interest in making sure you pay your property taxes. In most states, if your home is foreclosed at a tax sale, your lender’s loan may be wiped out. Because of this, your mortgage gives your lender the right to foreclose before the tax sale to protect their interest. Even if your home doesn’t go to tax sale, it may go to foreclosure auction, though this is rare.
Bank may impose escrow impounds
Your lender may also insist on collecting an additional amount each month to pay for your property taxes. This amount, called an impound account, is kept in a reserve account specifically for paying your property taxes and homeowners insurance each year when they are due. The benefit of an impound account is that you don’t have to remember to save up for a large property tax bill each year, as the bank is doing that for you.
Bank may pay, but add costs to mortgage
Alternatively, what often happens is your lender will pay the defaulted property taxes. Lenders are usually notified of upcoming tax auctions by the County if they have a loan on a property. If the taxes are not paid, your lender may pay the defaulted amount at the last minute, to prevent their loan security wiped out. If your lender does this, then they will add whatever amount you owed, plus penalties to your existing loan amount. As a result, you will end up paying interest on your property taxes over the life of the loan.
If you don’t have a mortgage and there’s no lender to pay the taxes, or if your bank fails to pay the property taxes, it may still go to tax sale.
Can someone take your house by paying the taxes?
There’s a common notion that if you pay someone’s property taxes each year for a specified number of years, that you will own their property. This is known as “adverse possession” or “squatters rights”. While this is possible, the law does not make it easy and there are different rules in different states.
First, the property taxes must be delinquent. Second, in California, the squatter must visibly, continuously and openly live in the home. While in possession must treat it as though it were their own home. The key in this condition is that it cannot be done in secret or in such a way that the real owner would not know the squatter had moved in. The length of time varies in different states. In California, it must be for a period of five or more years. In Florida, the time frame is seven years. But in Texas, the time frame can be as long as ten years.
Adverse possession usually requires going before a judge and proving all of the above conditions were met in a quiet title action. Whether you are the original landowner trying to keep your property, or the squatter, the court costs can be significant.
Property tax exemptions
In most states, there is a homeowner’s exemption for property taxes. In California, it’s just a $7,000 discount off of the County’s appraised value of your home. It’s not a lot, given home prices in California, but it amounts to a tax savings of $70 each year for homeowners.
In addition to the Homeowners, exemption there are exemptions for veterans and disabled veterans. The exemptions for disabled veterans is substantial. In 2018, California’s disabled veterans exemption was as high as $202,000 from their home’s value.
The county tax assessor marks your home for this deduction when you complete your Preliminary Change of Ownership form (see How do I Dispute a Property Tax Bill above).
If you aren’t sure if you are receiving one of these exemptions and should be, check your property tax bill. You can also look up your property on your county’s tax assessor’s website. If you believe you aren’t receiving the exemption and should be, you can file a Homeowners Exemption for free.
California tax auction notification process
In California, the County Tax Collector must notify a delinquent homeowner that their home is going to tax auction by certified mail. This notice must be at least 45 days in advance of the sale, but no more than 120 days. In addition, the County must post notice in a public newspaper (you can tell this is an antiquated requirement). If no newspaper is available, it must be published in at least three public locations.
Simultaneously, most California counties post a list of Assessor Parcel Numbers (APNs) on their County website showing which parcels are up for auction and how much is owed in taxs.
What if I cannot pay my property taxes?
If you cannot pay your property taxes, don’t panic. However, you should also not ignore your situation. There are solutions, but the longer you wait, your options will become less and less agreeable. You may need to sell your home to an investor or cash buyer.
Property Tax Postponement Program
In California, you may be able to take advantage of the state’s Property Tax Postponement Program. To qualify, you must have a household income of less than $35,000 a year. In addition, you must be at least 62, blind or disabled AND have at least 40% equity in your home.
It’s not a tax forgiveness program, simply a postponement. The state charges 7% interest, which is pretty steep. The postponed taxes and interest must be repaid when the property is sold, changes ownership or the owner dies. The good news is that it allows the homeowner to postpone their property taxes indefinitely, and according to California Legislative Office, are less costly than reverse mortgages.
You may be entitled to excess proceeds from the sale
You may be entitled to excess proceeds from the sale. After the county’s taxes, fees and penalties are paid, any mortgages and recorded lien holders are also paid. Lastly, those who hold legal title to the home at the time of sale, receive any left over proceeds. In order to receive these funds, you must file a claim with your county tax collector within one year of the sale. This is good news, but it could be better.
While you may receive some money from the tax sale, your lender’s and tax collector’s penalties can add up. This can leave you with less than you might have received had you simply sold your home before the tax sale. Furthermore, buyers at property tax sales, are looking to buy homes at significant discounts, and hoping to only pay the defaulted tax amount. That may leave you without any chance of excess proceeds.
What do I do if I’m out of options?
If you cannot afford to pay your property taxes, your best solution may be to sell your home. If it’s still a few months away to the tax sale, and your home is in good condition, you should consider selling through a real estate agent. A good Realtor® can market your home and get you the highest and best price for your home.
On the other hand, if you’ve run out of time, or your home has significant deferred maintenance and needs repairs, selling to a cash buyer or investor may be a better option. Cash buyers are able to close quickly and therefore prevent your home from going to tax sale. The benefit to you is you have a chance to keep more of your equity.