Most people are aware that Proposition 13 is a boon to property owners in a rising market. Before Proposition 13 when the prices of homes were going up property owners cringed at the arrival of the annual tax bill after a house in the neighborhood sold for a record high price. This was because they knew their bill would reflect what the new neighbor was willing or able to pay. Now because Proposition 13 limits annual assessment increases to two percent property owners have the security of knowing what their taxes will be from year to year. This has been especially important in recent years that have seen annual double digit inflation in California property values
But what about a declining market? What happens to those who bought at the height of the market and now see their homes have decreased in value by 15 percent or more?
Currently most of the attention seems to be on those borrowers and lenders who agreed to highly speculative loans — often interest only — when the market was strong. The debate goes on in Washington and Sacramento as to whether or not taxpayers should be bailing out those who made bad decisions now that the housing boom has gone bust.
However for those who bought recently using sensible conventional mortgages and who intend to remain in their homes there may be some good news in the midst of the housing slump. Because of Proposition 13 these properties likely qualify for a tax reduction.
If you are one of those whose property’s market value has declined to less than its taxable value on the assessor’s books you can apply for and likely receive a tax cut. This cut is temporary but the savings are permanent.
In a number of counties property owners may not even have to apply to receive a tax reduction. Many assessors are being proactive automatically reevaluating those homes that were purchased from 2004 to 2007 at the height of the housing bubble
Recent homebuyers who do not get a reduction notice and who believe their property has declined significantly in value should contact the county assessor to request a reduction. Since property values nearly doubled between 2001 and 2006 those properties purchased before 2001 are unlikely to qualify for any reduction since any new lower value will still probably be much higher than the Assessor’s valuation for tax purposes.
A good rule of thumb is if you believe your home would sell today for less than the value reflected on your tax bill you should apply for a reduction
However homeowners who receive a tax cut would be wise to keep in mind that when the value of their property goes up again so can their tax bills. Still while property owners can be charged less they can never be charged more in any one year than the maximum allowed under Proposition 13. This can be calculated by increasing the base value (usually the purchase price) by 2% compounded for each intervening year you have owned your home. (Using a compound interest calculator available on the Internet will simplify the work.) The maximum property tax liability in any one year is one percent of this total
Finally the housing slump has prompted some opportunistic companies to contact recent home buyers and offer to file a tax reduction request with the assessor’s office in return for a fee usually a significant percentage of any savings that are realized. However since the procedure of applying for a reduction is relatively simple and without cost homeowners should consider doing it themselves.
Jon Coupal is President of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.