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 may increase each year.
Prop 13 limits property taxes to roughly 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). If the same owner has held the property since Prop 13 was adopted, then their home is taxed based on its assessed value in 1975.
The property’s assessed value may 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.
On the other hand, 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. [Calif. Revenue and Taxation Code §51(e)]
Prop 13 insulates homeowners who are older, retired and living on fixed incomes from payment shock when property values increase dramatically in a short period of time. Thus, Prop 13 allows them to remain in their home throughout their retirement, as they can plan for predictable annual property tax increases. Otherwise, in a market where home prices (and assessed values) are escalating quickly, they may be unable to pay their taxes.
Proponents also claim fixed annual property tax adjustments fuel the housing industry, as they give potential homebuyers an incentive (one among many homeownership subsidies) to invest in homeownership. Further, Prop 13 promotes neighborhood stability since the longer a homeowner stays in their home, the more tax savings they experience during periods when asset inflation exceeds consumer inflation.
Published on 2014-12-10 14:23:28
