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How do property taxes work in California?

Untitled Design (89)
Justin Coupe
Untitled Design (89)

California properties are among the more desirable in the nation, which can drive the median value of homes up considerably compared to other states. For homeowners, this is often a dream come true, and a big part of why people choose to live and invest here in the sunshine state.

Knowing this, it might surprise you to know that California homeowners also enjoy property taxes that are below the national average – an excellent thing to be reminded of when the bill comes due each year.

For many people, property tax bills are one of the easiest things to sweep under the rug because they’re not paid as frequently as other bills – such as cell phones, car payments, or electricity. However, property taxes are an unavoidable part of homeownership, so it’s a good idea to have a basic understanding of what they are, how they’re calculated, and how they factor into your overall financial picture.

Tax Calculation

Taxes vary from state to state, and are subject to both local jurisdiction and statewide tax systems.. In California, the statewide rate is 1% of the assessed value of the property.

Property Tax Bill

Additionally, there may be public service assessments in certain areas as approved by voters, which are often used to fund education, transportation, water, and other community services. In general, you can expect to pay between 1% and 1.5% after everything is said and done, although rates can be higher in some specific areas. Property taxes in California will never be below 1%.

Most countie provide websites where the general public can view specific property tax rates and assessments. Some assessments will be based off a small percentage of the home’s assessed value and other assessments will be a flat rate per parcel. Assessments can change year to year depending upon the how the tax was written (see more about melloroos here).

The process is a formulaic one and, for the most part, very hands-off for homeowners. The county assessor determines who owns which properties, sets a taxable value that informs the owner how much will be owed, applies legal exemptions and considers other contributing factors, then completes a tax roll to show the assessed values.

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Typically, the assessed value matches the sales price and then is adjusted each year thereafter. Next, the county auditor or controller calculates the total amount of taxes due, then the tax collector distributes the bill and collects the tax payments.

Although there are several moving pieces when it comes to determining where each tax dollar is designated to go, the bulk of these calculations are handled at the county level before the bill is delivered to you. You can expect to receive a straightforward number that reflects the total amount owed and is payable in two installments (more on this later). The great thing about property taxes is that all money collected stays within the county.

There are a few important things that can help keep property taxes lower. In addition to prop 13 (which we will cover later), many counties in California allow for certain exemptions.

Written into the California constitution is the homeowner’s exemption which allows for a reduction of up to $7,000 in taxable value to primary residences (this saves you up to $70/year). Many counties also allow for re-assessment exemptions for family to family transfers; this can be particularly valuable for properties that have been in the family a long time. Check with your county tax assessor to see if this would apply to your family to family transfer.

Propositions 60 & 90

Prop 60

Under prop 60, California homeowners 55 and older get a one-time chance to sell their primary residence and transfer its property-tax assessment to a new one, but the market value of the new home generally must be equal to or less than the market value of the old home.

Prop 90

Under prop 90 counties can allow property values from another county to be transferred to their county. Currently only 8 counties participate in prop 90.

Proposition 13

The most notable and famous factor working to the owner’s advantage is the result of Proposition 13, a tax amendment established in 1978. This occurred in response to home values rising faster than income and inflation.

While this is generally a positive thing for homeowners, the outcome was back-breaking property tax bills that were quickly becoming unaffordable. The domino effect elevated the risk of displacing long-standing residents from their homes.

Fortunately, the introduction of Proposition 13 offered a comprehensive solution to protect Californians from this phenomenon: property assessments cannot exceed a 2% increase of the year prior. In this way, homeowners are insulated against major spikes in the market and protected against the risk of losing their home due to unreasonable taxation and the subsequent liens.

It’s important to note that the 2% maximum increase applies only to existing homeowners, not new ones. When a home is sold and bought, it resets such limitations and the new owners pay the 1% general state rate on the entire value of the property, regardless of how much that increase may be. As noted earlier, the new assessed value typically matches the sales price.

Paying your California Property Taxes

When it comes to the matter of paying your property taxes, these are due in two biannual installments, and determined by a fiscal year calendar.

When are your property taxes due?

The first half of the fiscal year is July 1 to December 31, and the payment for that half is due on November 1 delinquent after December 10. The second half runs January 1 to June 30, with a due date of March 1 delinquent after April 10.

What happens if your payment is late?

Late payments result in a 10% penalty that will be applied for any monies received after those dates.

Yikes!

How to avoid late payments on your property taxes

In order to avoid late penalties (and the stress that comes along with them), it’s important to factor in your property taxes throughout the course of the year so the bill doesn’t come as a sudden and significant surprise.

One strategy is to divide up your estimated taxes for the year by 12, and budget the monthly amount into your savings. That way the money will be set aside and ready to go when you need to pay your bill.

Impound accounts are another way to ensure your property taxes get paid on time.

How impound accounts work

Often, your property taxes are wholly, or partially, rolled into your monthly payment, so you will most likely never have to pay the full amount out of pocket. If you overpay throughout the year, you’ll receive a refund come tax time. If you underpay, you’ll receive a bill for the difference.

In order to determine the final figures for your specific situation, you can consult your lender to break down the specifics of your loan – or, if you’re in the process of buying a house, include these questions in the purchasing process so you know exactly what to expect.

Are impound accounts optional?

Yes and no. If you have a conventional loan and you have put more than 10% down, you’ll be able to choose whether you want to have an impound account.

Sometimes though, impound accounts are required...

Most lenders require government loans require property taxes and hazard insurance be impounded (FHA, VA and USDA) and in California, conventional loans with less than 10% down be impounded as well.

Supplemental property tax bills

So, if you’re purchasing a new home, you can expect what’s called a ‘supplemental tax bill,’ which is issued to close the discrepancies between previous tax rates and the new tax rate based on the most current assessment.

If you’re planning to purchase, ask your mortgage advisor to help calculate what you might expect to pay in supplemental taxes so you’re not caught unaware with unexpected expenses when it arrives in the mail.

Supplemental property taxes with an impound account

If you are impounding your tax payment into your monthly payment supplemental tax bills can be particularly disruptive. Your lender will receive a copy of the original tax bill but will not receive a copy of your supplemental bill.

If the homeowner does not forward the supplemental property tax bill onto the lender, the lender will not be aware of the additional taxes owed and may inaccurately lower or adjust your impound account. This may result in the lender not adequately collecting enough taxes and then raising your impound account drastically in the future.

The best way to handle all supplemental tax bills is to immediately contact your lender to make them aware of the additional taxes owed so they do not incorrectly adjust your future payments.

You don’t have to become a property tax expert to buy a house. The most important part of the process is knowing you can trust the professionals involved in the process – from your real estate agent to your mortgage company to your tax specialist. They will deal with the nitty gritty, and make sure your best interest is represented.

Even so, it’s important to understand the fundamental aspects of your personal finances so you can feel confident about every step of the process, and know you’re setting yourself up for a bright financial future in a gorgeous home!

If you have questions about the process of buying a home, or the particular property tax details of your transaction, feel free to drop us a line. We’re here to help.

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