In June 1978, California voters changed the property tax system by approving Proposition 13.
This tax reform reduced tax rates on homes, businesses and farms. The passage of Prop 13 allowed property owners to estimate and plan for the future property taxes.
Prior to Proposition 13, annual assessments for both real property and personal property were based on current fair market value. As a practical matter, fiscal and staffing constraints prevented county assessors from physically revaluing each property in their respective counties every year. Consequently, reappraisals were usually conducted on a cyclical basis. Typically, these cycles ranged in duration from three to five years. Between physical reappraisals, county assessors would often apply interim value increases based on trending factors. This system of assessment ensured that all property, subject to the limitations of cyclical appraisal programs, was assessed at its current fair market value.
Proposition 13 changed the method of property taxation from a current market value system to an acquisition value system. Proposition 13 rolled back property assessments to the 1975-76 levels and locally assessed real property would thereafter be reassessed to fair market value only upon a change in ownership, or completion of new construction.
When a change in ownership occurs, a new base year value is established at the current fair market value on the date of the change in ownership. If a partial change in ownership occurs, only the portion that changes ownership is given a new base year value. That change is based upon its current fair market value on the date of the change in ownership, and the portion that did not change ownership retains its existing adjusted base year value.
The base year value of any newly completed construction is its current fair market value as of its date of completion. New construction in progress is appraised at its fair market value on the January 1 lien date. With new but partial construction like the addition of a bedroom, the new construction is given a new base year value upon the completion of the construction at its current fair market value, while the pre-existing portion(s) of the property retain their existing adjusted base year value.
A property can be temporarily reassessed at the lower fair market value if the fair market value drops below its adjusted base year value.
Even though a property may be temporarily assessed at its current market value, its base year value is still annually adjusted by the inflation factor. When the property's current fair market value returns to or exceeds its adjusted base year value, the adjusted base year value is restored to the assessment roll.
I often hear real estate professionals frustrated at the thought of a repeal of Proposition 13. I often wonder if they realize that Proposition 13 is a restraint on the real estate market. So many homeowners avoid a move because of the massive jump in property taxes.
For those trickle down economists, moving provides work for Realtors, escrow and title officers, appraisers, inspectors, contractors, designers, furniture stores, movers, bankers and the list goes on and on. These will probably be the arguments for repeal of Proposition 13 as the buzz grows louder.
Fortunately, for those 55 or older, Proposition 60 and 90 may allow one to carry the assessed value to a replacement dwelling under certain circumstances and with cooperating counties within California.