Property taxes in California are calculated by the state-approved 1-percent rate, Mello-Roos taxes, parcel taxes, and any additional local government taxes and levies.
Property taxes in California have become an enigma to taxpayers. Everyone in California has heard of Proposition 13 (1978), the initial state guideline which proscribed a minimum 1-percent tax. Naturally, taxpayers assume this means their tax will only be 1-percent of the assessed value of their home. But, that’s just the bare minimum. It’s really no different than sales tax. There’s the state sales tax then the local sales tax.
How do California Property Tax Rates Work?
The local government, when assessing property taxes, first uses the 1-percent tax from Proposition 13 (1978).
This is also known as the General Tax Levy. It’s just step one in the assessment.
The second step in the assessment is the voter-approved taxes such as school district, city, and water taxes. The same taxes most people pay as part of their property tax.
The third step in the assessment is the specialty taxes such as Mello-Roos taxes, a tax designed to fund special public facilities such as schools and parks.
This method is used to insure various public services are funded.
A Brief History
To understand California property tax, one must look back at the chaos that lead to such strenuous guidelines. The year is 1978. Taxpayers are outraged at funding public facilities for what seems like lavish amounts of money even though they benefit from the use of public sewage (also known as the Mello-Roos taxes). California knew this was leading to tax noncompliance with their citizens. It was then Proposition 13 (1978) was passed. It restricted the amount local governments could tax on real property such as real estate.
Though a real game changer and aid, Proposition 13 (1978) would create a dilemma for local government. It made it where Mello-Roos taxing was difficult. As Mello-Roos is responsible for paying for police, fire fighters, schools, and parks, it became crucial to reinstate the ability of this tax. Then came 1982 and the passing of Mello-Roos Community Facilities Act of 1982. It allowed the tax return but with strict limitations as to not take advantage or overcharge the taxpayer. By passing this bill, counties were able to regulate their taxing of California property on a local government level.
What is Personal Property Tax?
First, let’s start with the definition of personal property. Under California’s Publication 29, personal property can be any tangible or intangible property except real property. Real property is defined as land, mineral rights, and improvements to land or structures. Why is knowing the difference between real and personal property important?
The most distinguishing reason is Proposition 13 (1978). Proposition 13 limits the amount real property can be taxed to 1-percent rate (again, this is only on the state level, local government can charge additional tax within reason). Personal property isn’t limited to the 1-percent tax rate.
In fact, California doesn’t impose a specific tax on personal property. Generally, this is due to the personal property in California a substantially low amount (usually no more than $400). For example, a taxpayer sold a couch for $350 and let’s assume they made a $50 profit on it. The taxation has to do with their annual return, not directly with their local government like other taxes.
How are my Property Taxes in California Calculated?
As mentioned before, the absolute minimum for California property tax is the 1-percent tax rate. By 1-percent, the law refers to the value of 1-percent of the property. For example, a house at 123 Lazy Lane is valued at $400,000. By taking the value of the property and multiplying it by 0.01, the amount would come out to $4,000.
So, a property valued at $400,000 will have a minimum property tax of $4,000.
In California, it is common for utilities to be taxed annually on the property tax. Different parts of California charge varying amounts for their water district/utilities. In larger metropolitan areas, the need for utilities increases and is usually more expensive.
In the case of county-specific taxes, every tax (outside of utility taxes) is voted on, usually by popular vote. In some cases, this vote may have been enacted by representatives (usually in larger cities). The county-specific taxes exist to fund special projects for the city such as infrastructure like repaving roads, funding public services, etc.
One of the most popular county-specific taxes is that of the Mello-Roos tax. For almost four years, it wasn’t a permitted tax. Though the Mello-Roos tax charges a nominal tax to maintain public services and facilities, it was once the center of controversy. It’s more commonly accepted today as it is a necessary tax for the functioning of a county. It is now heavily regulated by the state of California which seeks to protect its residents from a gross amount of property tax.
How do Special Taxes Work?
According to Publication 29, special taxes added onto the property tax come about due to a need to improve infrastructure, fund various county projects, or any other need approved by California law.
Mello-Roos taxes, for example, are levied on a twenty to twenty-five year-span. Mello-Roos bonds are used with a specific goal in mind on a county-by-county basis. The county uses the bonds to pay-off a public property, repairs, or maintenance.
Parcel taxes, another special California property tax, is a voter-approved tax. Parcel taxes have the unique characteristic of fluid spending meaning they are not just for public services, infrastructure, etc. They can be used for building schools, improving the look of the county through renovation and maintenance, or anything else the county determines the money needs to go toward. It should be noted Parcel taxes require a special vote of two-thirds to be passed and 90-day notice before the voting of the proposed tax.
Parcel taxes, unlike Mello-Roos and utility taxes, is based upon the features and purpose of the property. This can include (but not limited to): developed/undeveloped properties, single-family homes/apartments, and by acre/square foot.
It should be noted under California statutes, unlike the rest of property tax paid every year, parcel tax cannot be written off on taxes every year. California’s Franchise Tax Board (FTB) does not permit the deduction as parcel taxes are not based on the value of the home.
Ultimately, it comes down to how the county measures out each property. It is likely the county will, of course, value developed property more than undeveloped property. The same scenario with apartments. Apartments may be valued more as they are, in theory, an income-producing asset. However, the common theme here is the property tax is not based on the actual value of the property but rather the stage of development and/or its structure.
County A has a plan to renovate to the Old Downtown over the next ten years. They want to repair the old, deteriorating buildings and repair the roads. Their plan calls for a $10 million budget. Though the amount is high, the county is certain the renovations will increase tourism and spending therefore ultimately benefitting the county.
Though the project will take place over the next ten years, the county decided to keep the tax bill on the taxpayers low by spreading the tax bill out over twenty-years. Let’s say there’s 10,000 taxable properties in the county. Take the $10 million and spread it out over twenty-years and divide it by 10,000 and the tax approximately comes up to $50 per property. When one views the tax bill like this, it makes paying for infrastructure manageable.
County B has proposed a new parcel tax which will add a new tax onto the current property tax. The parcel tax will charge a small amount for undeveloped land and a slightly bigger amount for developed land in designated neighborhoods. The county issues the appropriate 90-day notice before the voting of the proposed parcel tax. At the end of the election, the proposed tax receives 60% support. Does it pass? No. Remember, under California law, two-thirds vote is required (66.67%).
How does a California Property Exchange for Out-of-State Property Work?
A California property exchange, also known as a like-kind exchange, requires the taxpayer to file a FTB 3840: California Like-Kind Exchange the year the property is exchanged and every year afterwards until the property is sold in a taxable sale. Side note, the FTB 3840 must be filed with the state return every year.
If you don’t plan on doing the work (filing the tax forms in a timely manner), then this avenue is not for you. The California Franchise Tax Board supervises this tax form and they are known for their dedicated pursuit and penalties for any taxpayer that forgets to file their forms in a timely manner.
Do Like-Kind Exchanges Affect My Federal & State Returns?
When like-kind exchanges occur, they must be reported on the state return on the informational return, FTB 3840. On federal tax returns, the like-kind exchanges can be tax-deferred until the selling of the asset. These like-kind exchanges are also known as 1031 exchanges in Internal Revenue Code (IRC).
The benefit of using the 1031 exchanges is there are no limits on how many exchanges a taxpayer can do. In most cases, the sale is taxed as a long-term capital gain. When the asset is sold, the income generated from the sale goes on both the state and federal tax return.
How Does an Out-of-State Property Exchanged for California Property Work?
It’s a similar scenario as the last question except for a major difference – property of another state that is exchanged in a like-kind exchange with California property would make the property when sold in a taxable sale is subject to California state taxes, not the other state’s taxes.
What Happens If I Don’t Pay My Property Taxes?
If you don’t pay your taxes by the due date, come July 1st, your property becomes known as “tax-defaulted” land. Once you hit the fifth anniversary of “tax-defaulted” land, the local tax assessor has the ability to sell your land to recoup the taxes due. The most common method is through public auction.
But, it doesn’t have to go that far. Most counties in California will accept installment payments on past due taxes. Why? Because seizing a piece of property especially one that is a residence is a huge headache. Not to mention, the county will have to evict the residents of the home if they don’t choose to leave. Then there’s the expense of the auction. Most tax assessors would prefer to accept installment payments.
What Happens If I Don’t Take Care of My Delinquent Property Tax?
Unfortunately, if you choose the road of actively ignoring the tax assessor and your property tax, the consequences are painful. The law gives you five years to make right on delinquent property taxes then the tax assessor will send you by phone or in-person, no less than 45 days and no more than 120 days, a notice to sell your home.
Think you can dodge them? No. The law foresaw this problem decades ago and added a little provision which says if the tax assessor cannot contact you personally, they will be required to send a written notice no less than five days before the sale.
Can I Save My Property?
You can, up until a point. The way California property tax works is the five years given to a taxpayer is the time to ‘redeem’ the property which means paying the delinquent property taxes. Even when you’re served notice of intent to auction your home, you still have a chance to redeem the home. However, your clock runs out at the close of business on the last business day before the auction. Once the auction happens, there’s virtually no way to redeem your house.
There is, of course, one exception to this – if by some miracle, the buyer backs out of the house they just bid on and doesn’t pay for it, then the county will give you another chance. Please keep in mind there may be more fees attached to redeeming your house at this point as the county had to go through the expense of organizing the auction and paying for all the associated costs.
Save the Date!
California property taxes are to be paid in two installments – first is due on November 1st and second is due on February 1st. Remember, if the first payment is not made by December 10th, it is considered delinquent and the second payment is considered delinquent if it is not paid by April 10th.