How are property taxes calculated (and how to dispute them)


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Wondering how much your property taxes will be after you buy your home?  This article looks at how property taxes are calculated and how to take advantage of your California Homeowner’s Exemption.  Additionally, we’ll look at you might be able to dispute the amount of your initial property tax assessment.

How are property taxes calculated?

Property taxes are based on the “assessed value” or “market value” of your home. This value is often different from your actual purchase price.  Additionally, how your home’s value is assessed can vary from state to state.  Typically, market value is the price agreed upon by a knowledgeable buyer and a knowledgeable seller. It assumes neither party is taking advantage of the other.  It is also sometimes known as an “arms length transaction”.    The most common type of arms length transactions occur with homes advertised by and bought using licensed Realtors®.

However, if you purchase your home privately, your local county tax assessor may set a value substantially different than the price you paid.

In California, your local county Tax Assessor sets the assessed value whenever ownership is transferred.  The assessor also reassesses value 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 can trigger a new assessment and possible increase in your property taxes.

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. Prop 13 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.

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 allowed 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 home 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, called comparable 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 comparing 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.  And you may have spent significant dollars upgrading the property since you purchased it.

This can result in wildly over valued appraisals if you purchased your home in poor condition. We’ve seen houses appraise for $175,000 that were purchased for $150,000.  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!

Property tax discounts (homeowner’s exemption)

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 assessed 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).

PCOR Property Tax Exemptions

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.

How do I dispute a property tax bill?

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.

Change of Ownership Report

 

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 your 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 does not have a 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.

Conclusion

If you recently purchased a home, now is the time to carefully look at your property’s tax assessment.  You should receive a supplemental assessment within six months or so of your purchase.  If you feel that it is incorrect, you will need to prepare pictures and documentation to support your valuation.  If you notice that you are not receiving your homeowner’s property tax exemption, be sure to contact your county tax assessor to claim your exemption.