Property Tax Reductions - California Style...

Property Tax Reductions - California Style...

With the decline in the real estate market those who own property and are able to hang on, typically end up paying too much for their property taxes to the local county tax assessor.

In California, we Passed Proposition 13 (Prop 13) - why back in 1978.  This was revolutionary legislation at the time and still continues to lead many states who continue to assess and collect property taxes like they were don a couple of hundred years ago.

You see, the traditional model was to reassess the value of the real estate on a fixed schedule - with some areas being as frequently as every year and others no more than every 5 years.  No scientific evidence or anything, but I believe every 2 years reassessment is the most common across the country, then and now...which is what it was in California, pre Prop 13.

PROP 13 IN A NUTSHELL

What Prop 13 did was establish a base line that is typically the purchase price.  Once the initial period is over to review the assessment this value is set in stone and will NEVER change on a permanent basis.  All future property tax is based on this value, so long as the owner continues to own the property.  Yes there are a few exceptions about transferring and keeping the same value, such as between generations in the same family - but that is not the topic of this article.

The whole concept behind passing this legislation by the voters, which incidentally can only be amended by the voters, is to protect long time homeowners from being taxed out of their homes.  Remember, California was experiencing a very desirable economy when this became law and home values were skyrocketing, year-after-year. Maybe not like what we've seen in the most recent boom, but similar...just a lot smaller numbers.

Once the base line is established, then the "Assessed Value" can increase by no more than 2% per year - but this is not mandatory.  According to Prop 13, the owner of the real estate has the right to appeal the value if the owner feels as if the assessed value is greater than true market value.  Upon a successful appeal, the value is temporarily reduced until the pendulum of the market reverses and market value once again exceeds assessed value.

Another very important aspect of Prop 13 is the tax rate.  Under the legislation, the MOST the state can collect is 1% of the assessed value.  ALL of the other taxes added to the tax bill, that will often drive taxes above the 2% level for newer homes, are either assessed at the time of construction (Mello-Roos) or voter approved assessments for services like schools, parks, police & fire protection.  This is why homeowner is unincorporated Riverside County area, say Valle Vista only pay 1.03% and a couple of miles down the road in San Jacinto, CA the tax rate will exceed 2%.

AN EXAMPLE

So, for example, let's say a homeowner buys a home for $100,000 and is taxed on that value, for the first year.  The tax paid would be $2,000.  The Base Value compounds on the previous years value and the taxes billed are then on the new compounded values...and so on and so on.

NOTE:  Although for my example I am using a low priced single family residence for the sake in simplicity of numbers, please KNOW that the exact same principals I share in this article apply the same as if it were a million dollar home purchased, a $10 million dollar office building, $25 million dollar shopping center, a $100 million dollar apartment complex or even $500 million dollars in undeveloped farm land.  The law is the law and the process is the same at all levels - just more complex documentation is needed the more expensive the real estate from San Jacinto to Sacramento and all other points in the State of California.

For our example, year two assessed value would be $102,000.  By year 10, the assessed value would still only be$119,509.  Following this same scenario, by year 25, the assessed value is now only $160,843.

So for those who buy a home and stay in it Prop 13 stabilizes the tax bill, allowing for consistent budgeting year after year.  The flip side, of course is when the property value is reassessed year after year.  Using the same example of a $100,000 purchase and with an average of a 5% increase in value, by year 10 the same homeowners are now paying taxes on $155,132 and can be taxed at a rate determined by the legislation and local tax boards - not the voters.  By year 25, with the 5% increase in value, the new value would be up to $322,509.  Now while the increase in equity will make for a nice retirement account, a la the American Dream, if the homeowner had to pay that much more in taxes it could literally drive them completely out of the neighborhood.

In our examples above - after 50 years, the fixed 2% adjustment to the base value would have the homeowner taxed on $263,881 while the 5% increase in equity would jump the tax bill to tax a $1,092,133 value for the same home!

WHAT ABOUT REDUCTIONS

As I mentioned earlier, the laws have evolved that allow for a property taxpayer to appeal the assessed value, which is common in both declining markets as well as recovering markets.

Back to our example of the $100,000 homebuyer, 10 years ago and is now assessed at $117,000.  While the property value may have peaked in year 7 at say $200,000 today, after the crash it is only worth about $80,000.  The property taxpayer can appeal to have the value temporarily brought to the current fair market value.  In many cases, County Assessors (Elected Officials) recognize the loss and decide it would be less stressful on County staff and resources to just give everyone a blanket reduction than handle all of the appeals that would otherwise be filed by the property taxpayer.

Just because the Assessor grants an automatic reduction does not mean that the owner of the real estate is not entitled to further reductions.  In our example, the Assessor may reduce the tax bill to an assessed value of $100,000 leaving the other $20,000 in lost value still taxed.  Unfortunately, most property owners will feel grateful they got something and let it go at that.

However, the taxpayer is entitled to reduce the assessed value to the true fair market value, at the time of the assessment.  Savvy taxpayers will file claim after claim, as the values continue to decline - as is their right and responsibility to their own bottom line.

Not only can tax payers appeal the value on the way down, but claims can also (and should) be filed on the way back up.  So, by example, the reduction in our sample single family residence is brought down to $80,000 and the market takes a turn north in year 3, the base line of the assessed value is now $124,337.  While the county may feel that to be appropriate at that time, a successful appeal can reduce and delay the climb back up, as well.

WHAT IS INVOLVED

First let me say, I am no expert and anyone contemplating doing this for themselves need to become very familiar with all of the state and local guidelines and regulations that dictate the procedural steps necessary.  The do-it-yourselfer must be very aware of the numerous timelines and deadlines, throughout the year and must have access to accurate data about active, pending and sold properties in the neighborhood.

There is no fee to process the application, on your own.

The alternative is to hire a third party company...and this is risky.  Many services have popped up selling simple do-it-yourself kits, which is nothing more than what can be found on the County Assessor websites.  Others are charging a higher fee, and processing claims in a paper mill fashion - just filing on everything whether it makes sense or not.

What anyone considering hiring any property tax reduction service must know is what level of service the company will provide for their clients...and if there are ever going to be any additional out-of-pocket expenses to the client.  If the County does not grant the reduction and an appeal hearing is scheduled...will the consultant be there and how prepared will they be?  What is their level of credibility?  How much experience can anyone actually have doing this sort of business, since property values only started to decline a couple of years ago.

MY REFERRAL

This is a totally biased opinion because I am referring a very dear friend who I first met in 1993 when we each had office space in the same building, in Running Springs California.  My friend had been successfully involved in the property tax reduction business for 3 or 4 years at that point working almost exclusively with large commercial properties.

His business continued to thrive and prosper for several years into the recovery when it finally went dormant around 2002, as the recovery had finally kicked into gear and started to escalate.

The good news, my friend never charged a client a dime.  He simply billed based on a percentage of the money he and his firm actually saved his clients.  I know he did great work - he was constantly on the move then - driving up and down the state looking at properties and investigating first hand the comps being used.  He would attend Assessor Appeal Hearings almost every week and when he went he had state-of-the-art (for the mid 1990s) presentation material that as thoughtfully and methodically assembled to drive home his point which more often than not resulted in his successfully driving the assessed value down below the actual market value.  He built a reputation in most of the County Assessors offices that if he was scheduled to appear at a Board Hearing, that he would serve the Assessors Head to them on a platter...which often resulted in stipulated reductions days before the hearing date...as the Assessors were tired of being embarrassed by my friend.

The good news is my friend is every bit a forward thinker today as he was in the late in 1980's when he started his first firm.  Summer of 2006, he came to me with his market forecast and new the time was ripe to start up his property tax reduction business, once again.  Agreeing with all he said, I was involved for a short while, laying much of the groundwork and even building the first company website.  Unfortunately or fortunately, I did not last with the company, as my own real estate business was getting ready to take off and I had to choose one over the other.  Today, we both have found success.

So, it is with great pride and respect that any California property owner, who is not losing their real estate to foreclosure, should contact the California Property Tax Associates for a free no obligation consultation.  Again, they specialize in high end residential and commercial real estate property tax reductions, throughout the entire state of California from the same small mountain community of Running Springs.  My friends name is Jim Guffey and today he and his sons run the business.