In the last few years most California homeowners have seen the value of their homes go ever higher. With core inflation under control the rapid rise in property values has fattened the balance sheet for many families. But even a cursory glance at history reveals that home values are subject to cyclical forces just like everything else.
Currently home prices are dropping across the nation and it appears that California is no exception. (Although the median price of an existing single family home in our state is up 4.8 percent from a year ago a more accurate measure tracks the selling price of individual properties. Thus measured the value of California real estate is backsliding). Moreover with an eleven-month backlog of unsold homes it doesn’t take a call to the Psychic Hotline to figure out something has to give or as they like to say on Wall Street the market is due for a "correction."
As recently as 1991 California saw five straight years of declining home prices. But those who bought houses as a long-term residence have to be happy with their investments. The value of the typical home has tripled since the market hit bottom in 1996. So even if prices begin to decline now in a few years most who bought property recently will be delighted they did.
Those who have owned their homes for a while and experienced the rapid run-up of home values over the last decade know the value of Proposition 13’s limitations on annual tax increases. Proposition 13 bases property taxes on what the home buyer could afford to pay at the time of purchase. It limits the tax rate to one percent of assessed value and annual increases in the assessed value to no more than two percent. This protects homeowners by making future taxes predictable — no unpleasant surprises. No longer is a homeowner’s tax liability determined by what someone else is willing to for pay their home.
Here is the interesting point. While the benefits of Proposition 13 are clear in a rising market what about those who buy at the top and then see a decline in the value of their investment? Are they now stuck with a higher tax bill than they would be under a more "traditional" market value based tax system?
The short answer is no. Prop. 13 has a built in protection for homeowners here thanks to a pro-taxpayer amendment to Prop. 13 overwhelmingly approved by voters just months after Prop. 13 was enacted.
Proposition 13 allows those who see a decline in the market value of their property to apply for a temporary tax reduction. If the value of the home drops to a level less than the value on the assessor’s books then the owner can expect to see their tax reduced based on the lower value. So if someone pays a half million dollars for a home — not at all unusual in a state where the median price is now $591000 — and two years later finds that the market value is only $400000 that person can have their tax reduced by 20 percent.
This reduction in assessed value can be obtained either by application by property owners to their County Assessors or in counties with responsible tax officials assessors will make corrections themselves across various classes of property depending mostly on when those properties were purchased.
Still for those who have their taxes reduced it is important to remember that the reduction is temporary. When the value of the home goes up again the owners can expect to see a tax increase. However at no time can the basic levy of assessment exceed the Proposition 13 trended value defined as one percent of the base year value increased by two percent for each intervening year.
The bottom line is this. Because of Proposition 13 one’s basic property tax cannot be increased more than two percent per year and under some circumstances in a declining market taxes can be reduced. Whether you purchased your home 20 years ago or last week Proposition 13 benefits you.
If there is any doubt about the wisdom of Proposition 13 — even after almost 30 years — know that we at Howard Jarvis Taxpayer Association are constantly contacted by taxpayers in other states asking "How can we get Prop. 13 here? Our property taxes are killing us."
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.