Is your property being reassessed due to new construction? Have you received a Notice of Reassessment? California’s property tax structure, colloquially known as “Prop. 13”, can be confusing even to the “initiated.” Like many states, California calculates property taxes based on the value of one’s property…the greater the value, the higher the tax.
Prop. 13 was designed to make property taxes stable and predictable. Generally, a property’s “assessed value”—the value used for computing property tax—cannot increase more than two percent (2%) per year. This is true no matter how much the market value of the property has actually increased.
This means that a property’s assessed value can lag far behind its fair market value. For example, say that a particular home increases by 15% in 2013, and an additional 10% in 2014. At the end of 2014, the assessed value can increase by only 4%, even though the market value has increased by 25%.
However, all is not lost for tax collector (in Contra Costa County it is Russell V. Watts, no relation that I know of). Under Prop. 13, the property will be reassessed to its full fair market value in certain situations. The most common situation is a sale or transfer to a new owner. At the time of the purchase, the property will be reassessed to its full fair market value. This can result in a dramatic property tax increase. The 2% limit on increased assessments will then limit future increases in assessed value until a new “reassessment event” takes place.
Sale or transfer is not the only event that brings joy to our tax collector’s heart. The Prop. 13 system allows a property to be reassessed if “new construction” takes place, at least to the extent of the new construction. This can be an unwelcome surprise to homeowners and landlords who want to make improvements.
“New construction” can take the form of an “addition” or an “alteration.”
- An “addition,” such as a new family room or swimming pool, is (understandably enough) considered “new construction.” The assessor will add the value of the addition to the assessed value of the property.
- An “alteration” qualifies as assessable new construction if it either (1) rehabilitates real property (or a portion) to the point that it is like new; or (2) converts the property (or a portion) to a different use.
While property tax law can provide a nasty surprise to the unwary, a little planning can go a long way. If you have questions about home improvements or tenant improvement work, or just received a surprise reassessment notice, it may make sense to consult with a tax attorney.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your tax or business situation, please email him at firstname.lastname@example.org or call him at 925-217-3255.