Tax Increases - Proposition 13
Proposition 13 (Prop 13), also known as the People's Initiative to Limit Property Taxation, was voted into California's Constitution in 1978. It caps the amount property taxes can be increased each year.
Prop 13 limits property taxes to 1 % of the property's assessed value. The property's assessed value equals the property's base value (the property's value at the time of purchase), plus an inflation factor determined by California's consumer price index (CPI).
The property's assessed value can increase a maximum 2% each year, to compensate for annual inflation. However, it may change upon a reassessment by the county assessor. A reassessment only occurs upon transfer of title, even if the property's actual fair market value (FMV) is substantially higher than its assessed value.
Notwithstanding, the property's assessed value may not be more than the current FMV. Thus, during a recessionary period of price decline, if a property's assessed value is higher than its market value the assessed value is reduced to its reappraised value. The property is to be reappraised annually until the value exceeds its original assessed value, at which point the original assessment rules apply.
When a title transfer triggers reassessment, the county assessor establishes a new base value for the property due to the change in ownership. This base value is equal to the value of the property at the time of transfer and remains with the property until the next transfer. However, not all transfers trigger reassessment.
Those transactions which DO NOT trigger reassessment include:
- A transfer solely between spouses [Rev & T C §63];
- A transfer between parent(s) and child(ren) [Rev & T C §63];
- A transfer from grandparent(s) to grandchild(ren) where the parents of the grandchild are deceased [Rev & T C §63.1 (a)(3)];
- A transfer between registered domestic partners [Rev & T C §62];
- The replacement of a principal· residence within two years of the sale with a replacement principal residence of equal or lesser value located in the same county or an accommodating county, by a person 55 years old or older [Rev & T C §69.5];
- Accommodating counties include Alameda, Los Angeles, Orange, Riverside, San Bernardino, Santa Clara, San Diego, San Mateo, Tuolumne and Ventura counties, which allow the assessed value figure to be carried forward to a replacement property in their county on the sale of a principal residence in another county; The replacement of a principal residence by a person who is severely disabled [Rev & T C §69.5];
- A title update to properly reflect the name(s) of the person(s) holding title to the property (for example, a name change upon marriage) [Rev & T C §62];
- A change to title recorded only as a requirement for financing purposes, or to create, terminate or reconvey a security interest (e.g., cosigner) [Rev & T C §62];
- The recording of a document to substitute a trustee of a trust, mortgage or other similar document [Rev & T C §62];
- A transfer that results in the creation of a joint tenancy in which the seller (transferor) remains as one of the joint tenants [Rev & T C §65]; or
- A transfer that returns the property to the person who created the joint tenancy (original transferor). [Rev & TC §65]
The transfer of a co-owner's interest on their death does not trigger reassessment when the deceased co-owner's interest is transferred to the surviving co-owner, if:
- The transfer is between two individuals who together own 100% of the property;
- The transfer of interest gives the surviving co-owner a 100% ownership interest in the property (thereby terminating the co-ownership); and
- The co-owners have been' co-tenants of the property, residing in it as their principal residence for at least one year preceding the transfer on the death of the co-tenant, signified by an affidavit signed by the surviving co-owner. [Rev & TC §62.3(a)]
A common transfer which DOES trigger reassessment is a transfer between siblings.