Nevada County Real Estate Market Snapshot - CA Property Taxes

Paul Sieving - www.PaulSieving.com

December 24, 2009 – Today California residential real property taxation is primarily regulated by Proposition 13 and Proposition 8.

After an assessors scandal in 1966, AB80, a reform bill enacted by the legislature, kept assessments at a uniform percentage of market value. During the real estate boom of the 1970s, home assessments escalated rapidly. By 1978, the threat to homeownership brought on by this escalation engendered new legislation in the form of Prop 13 in June, and Prop 8 in November.

Both measures were on the ballot in June and Prop 13 won due to its controlling effect on rising assessments. Once Prop 13 was in place, the effectiveness of Prop 8 as an additional control was increased and it also passed in November.

The constitutionality of Prop 13 was immediately challenged by the taxing authorities, and after a long trip through the courts, the issue of acquisition-value assessments reached the U.S. Supreme Court in Nordlinger v. Hahn. In a stunning 8-1 decision, the court in 1992 upheld California”’’s acquisition-value system.

Proposition 13 – Limits the property tax rate to 1 percent plus voter-approved bonded indebtedness, and defines taxable value as the lower of the property”’’s Factored Base Year Value (FBYV) or market value on lien date, January 1. Factored Base Year Value is the market value of the property when it was acquired by the current owner, plus the value of any new construction, plus an inflation factor of no more than 2% per year. Taxable value can increase more than 2% in one year if the property experiences a change in ownership, new construction or received any temporary reduction in taxable value in a prior tax year.

Proposition 8 – Amended Proposition 13 to provide for declines in value. Prop 8 requires the Assessor to enroll the lower of either: (1) the Factored Base Year Value, or (2) the market value as of the annual lien date Jan. 1. Prop. 8 reductions in value are temporary reductions that recognize the fact that the market value as of the January 1 lien date of a property has fallen below its current Prop 13 factored value.

Once a Prop 8 reduced value has been enrolled, that property’s value must be reviewed each year as of the January 1st lien date, to determine whether its market value is less than its Prop 13 factored value. Prop 8 values can change from year to year as the market fluctuates. When the market value of the Prop 8 property increases above its Prop 13 factored value, the Assessor will once again enroll its Prop 13 factored value. In no case may a value higher than a property’s Prop 13 factored value be enrolled.

Properties enrolled under Prop 8 provisions are not subject to the 2% annual increase limitation that applies to those enrolled under Prop 13 provisions.

The combined effect of Props 13 and 8 is to limit the escalation of residential property tax assessments to a manageable level and to provide temporary relief for the taxpayer when the market value of a property falls below the Prop 13 factored value.

The Assessor of each CA County is charged with implementing these laws for the benefit of the taxpayer, including an assessment appeal process for the taxpayer who feels that the market value of a property my have fallen below the Prop 13 factored value.