If you live in California, you may be wondering what home improvements increase property taxes there. The short answer is that property taxes can increase when homes are sold or new construction takes place. Home improvements are considered new construction when they substantially change the way the property is used or rehabilitate it to a “like new” condition. The following guide discusses what home improvements make property taxes go up in California and more.
What’s Behind Property Tax Increases in California?
Properties are most commonly reassessed when they are sold, but as mentioned previously, taxes can also increase when property owners make improvements that are considered new construction. These improvements can be anything from rehabilitating your kitchen to incorporating outdoor landscaping.
To put it another way, you will still be charged higher rates if it is considered new construction, meaning that more than 50% of its original materials were replaced by like-new ones.
How Does Proposition 13 Work?
It’s hard to discuss property taxes without referring back to Proposition 13, the tax law that prevents runaway property taxation in California.
To explain, the way property taxes are assessed in California was changed in 1978 when voters approved the People’s Initiative to Limit Property Taxation, which is more commonly referred to as Proposition 13.
The measure found its way onto the ballot because real estate values in the Golden State had increased by almost 300% in just 10 years, and many residents were worried that rising property taxes would force them out of their homes. Proposition 13 addressed this issue by restricting the rate property tax assessments can increase every year.
What Qualifies as Taxable Home Improvements?
Determining whether home improvements in California are new construction can be complex, and there are situations where major modifications would not lead to a property tax reassessment.
Improvements that would usually be considered new construction do not increase property taxes when they are made to repair damage caused by a natural disaster or improve access for the disabled. In these situations, property owners could even qualify for a property tax reduction to help offset their costs.
When improvements are not made to repair storm or fire damage or to make the home more accessible, they may be considered new construction if they:
- Are substantial: Property taxes are reassessed in California when officials determine that improvements made to a property or the land it sits on is substantial. Replacing kitchen countertops or retiling a bathroom floor would not normally lead to a property tax reassessment, but converting an attic into a bedroom, adding a window or installing several new fixtures probably would.
- Renovate the property to a “like new” condition: Rehabilitating a home in a way that extends its economic life will usually lead to a property tax reassessment. Taxes could also increase if only a portion of the property is rehabilitated to a “like new” condition or the work changes the way the property is used.
- Physically alter the land: Planting trees, laying a new lawn or installing a pond are unlikely to lead to higher property taxes, but work that substantially alters land or changes the way it is used could trigger a reassessment.
- Upgrade fixtures significantly: Renovating or modernizing home fixtures can result in a property tax increase if the end result is substantially equivalent to what would have been accomplished by installing a brand-new fixture.
The wording of the law is somewhat nebulous because no two properties are the same, so officials use their judgment when deciding whether a reassessment is warranted.
Cosmetic improvements and minor home repairs or renovations will not usually result in a higher property tax bill, but adding square footage or rehabilitating or modernizing a property significantly could result in higher taxes.
How are Unauthorized Improvements Uncovered?
To ensure that home improvements and new construction do not escape the attention of the authorities, copies of all building permits issued in California are automatically sent to property tax assessors.
Local authorities may also study satellite images or use drones to look for unauthorized improvements. The determining factor in these situations is whether or not the improvements made to a property amount to new construction.
How Much Will My Property Tax Increase Annually?
That depends, and here’s the explanation.
When Proposition 13 was passed, property taxes in California were based on 1975 home values. A residence in the Golden State that has not been sold or substantially improved since the measure’s passage is still taxed according to its 1975 base year value.
The amount of taxes will have increased every year since 1978, but the value of the property for tax purposes will reflect adjusted 1975 home prices.
Proposition 13 caps property taxes at 1% of assessed value and limits increases to 2% per year, but the measure also allows officials to raise additional taxes to cover the costs of schools and infrastructure. This can raise property taxes higher than 1% of the appraised value, but all increases must be approved by voters.
When work is done to a property that amounts to new construction under California law, the value of the improvements is based on current market values. However, that does not mean the entire property is reassessed. When making this decision, officials consider the scale of the renovations or improvements.
What follows is a list of two other influential factors to consider when it comes to qualifying home improvements: 1) New or substantially new construction and 2) additions or renovations.
New or Substantially New Construction
When the improvements result in a property that tax assessors consider to be new or the equivalent of new, the date on which the work was completed is used to establish a new base year value. This means that property taxes are adjusted to reflect the real estate market in the new base year instead of 1975 or the last time the property was reassessed.
Additions & Renovations
Additions or renovation work that improves a property substantially but does bring it to “like new” condition will also establish a new base year value, but only for the part of the home that was improved. The existing base year is used to determine the home’s value in these situations, but taxes still increase because the value of home improvements are calculated based on current market conditions.
Does Repairing, Remodeling & Performing New Construction Cause a Property Tax Increase?
California law requires property tax assessors to place a value on new construction even if a building permit was not issued. They place a dollar figure on the value of home improvements by using one of the following three appraisal methods:
- The cost approach: When the improvements to a home do not make it new or the equivalent of new, tax assessors usually use the cost approach to determine the value of the work done. To calculate the full economic impact of home improvements, officials check the costs of labor, materials and permits. They also consider the contractor’s profits and overhead. The California State Board of Equalization publishes a list of building costs each year to simplify the process.
- The sales comparison approach: Homes that have been renovated to “like new” conditions are reassessed using the sales comparison approach. This is done by checking recent sales of similar properties in the neighborhood. Both the home and the land it sits on are appraised, and a new base year value is established.
- The income approach: When renovations are made to apartment buildings or other properties that produce income, the reassessed value may be based on the increase in revenue the improvements will generate. This is calculated by checking rents in the area.
What Else Can Cause Property Taxes to Go Up in California?
Proposition 13 was passed to limit property tax increases in California, and homeowners can only be asked to pay more when they make substantial improvements.
When these improvements result in a home that is new or the equivalent of new, the revised home value is based on more than just the costs of completing the work. In most cases, the desirability of the area will affect the new value far more than the amount of money invested in improvements.
Some parts of California have seen spectacular increases in real estate value because of gentrification. This often happens when new businesses move to an area and pay far higher wages than existing employers. In San Jose, home values began to soar in the 1970s when technology companies flocked to the area to create what is known today as Silicon Valley.
The “No Visitors” Policy
Instituting a “no visitors” policy could prevent tax assessors from entering a property. However, this rarely does much to prevent property tax increases as officials have several ways to get around this kind of restriction.
The most common technique used is basing a new value on photographs taken from the air or a public street. Properties are then taxed according to their perceived value.
State & Local Budgets
State and local authorities rely on property taxes to pay the costs of providing essential services, but sometimes the money collected is simply not enough to cover all of the bills.
Frequently Asked Questions
Here are a few questions we frequently get asked about property tax increases due to home improvements in California.
What can cause a property reassessment?
A property reassessment occurs automatically when there are changes to the square footage of a home, or if additions, remodeling and other alterations increase its value by at least 50% in one year. However, tax assessors usually wait for homeowners to report improvements before they send out re-evaluation notices.
Does renovating my kitchen increase taxes?
Yes. Renovating a kitchen increases the value of your home. Upgrades to appliances, cabinets, countertops, square footage etc. can all boost values dramatically, but this is especially true when new wood flooring or higher-end vinyl tile are installed over existing surfaces. This goes for other areas in your house like the bathroom too. As you renovate your property, the value goes up. Meanwhile, so does your taxes.
What causes your property taxes to increase?
The most common way property taxes are affected by home improvements is through reassessment. This happens when your home changes in size, or if additions increase its value to more than 50% of the original purchase price. Property assessments can also change due to renovations that add significant income-generating potential, but this does not happen very often unless you own a business or rent out a room.
In addition, there are general property taxes or those not collected for special means that cause your taxes to increase every year. As mentioned, they are limited by California’s Proposition 13 to 1% of the market value of your property. Secondly, Prop 13 restricts the increases in assessed value to a 2% annual rate.
How do I avoid property tax increases?
This is by far the most frequently asked question, and there are several things you can do to avoid increases. For instance, you can limit home improvement projects. Another thing you can do is walk with the tax accessor while they evaluate your home. The tax preparers at Tax Crisis Institute know the ins and outs of property tax regulation, so you can also come to us for help in avoiding increases and saving money.
Does adding a built-in pool affect my property taxes?
Yes, adding built-in swimming pools or a big deck to go with it are considered tax-affected improvements in California, as both are considered significant construction and add value to your home.
Does adding a new roof increase my property tax?
Yes, adding a new roof to your home will increase your property taxes for the same reason a pool will.
What about landscaping?
Planting a few trees will not make property taxes go up, but significantly altering the outside property will. Think of landscaping as the type that professional landscapers do to your property to beautify it. California considers landscaping a significant outside home improvement that adds value to your home.
What doesn’t make property taxes go up in California?
While there are several things that can cause your property taxes to go up, there are also things that do not increase your tax bills.
For instance, replacing existing windows or doors does not trigger a reassessment because these improvements typically only add value to properties in the range of $25-$50 per square foot, according to our experts at Tax Crisis Institute.
So you will probably see no change in your property taxes as long as they stay within this range.
In addition, there are improvements that will not increase your tax bill even if they add significant value to the property. These include interior painting projects and carpet replacements.
Any Other Questions?
If you have any additional questions about home improvements and property taxes, please feel free to ask our California tax preparers at Tax Crisis Institute! We are the leaders in tax reduction and will be happy to answer questions for you.
We stand as the leader in tax representation for our customers in California and Las Vegas, Nevada for over 30 years. To learn more, contact us online through our website or call us at one of our locations.