Information Resources for Home Owners

 

How the Property Tax System Works

Post California Proposition 13

When You Purchase
When you purchase a home, the California County Tax Assessor reassesses the property and sets a new property tax amount based on your purchase price. Your property tax base rate will be approximately 1% (1.04% in HB) of your purchase price, plus any voter approved bonded indebtedness of the community such as a "Mello Roos" assessment or "pest abatement". The Preliminary Title Report is a required disclosure from the seller which will detail these and other types of liens, assessments, easements, etc. that are tied to the purchased property. Review this document carefully. If you (as the Buyer) do not fully understand what you are reading consult with your Title Representative who provided this report to your Realtor and escrow officer for disclosure by the seller to the buyer.

Thereafter
In future years, the tax assessor is allowed to increase the accessed value by a maximum of 2% per year. This increase can be challenged by the homeowner in an Assessment Appeal.

Historical Note

Beginning in 1992 (and again in 2006), the California real estate market began a decline. Post 1992, the Assessor and the Assessment Appeals Hearing Officers and Boards reduced substantial numbers of property values in Orange County because the assessed values were higher than actual market values. The majority of these reductions were not permanent, however, but were temporary annual adjustments to reflect the market conditions that existed at that time.

Since then the housing market has reacted to a much improved economy and market values increased accordingly. This means that many properties may have been temporarily reduced below the actual market value. Therefore, homeowners experienced increases in their properties’ assessed values during the following years until full recovery was reached. Although these increases may be substantial, they may never exceed the property’s initial base value plus any added improvements value and a maximum 2% per year CPI inflation factor. The total of these three elements is called the "indexed value." This indexed value remains your actual taxable assessed value.

The real estate market dramatically improved since the 90’s and property values have gone up dramatically. Although assessments have and will increase, the good news is you were able (and will be able to in the furture) avail yourself to temporary property tax reductions during periods of property value stagnation or reduction as experienced between 2006 and 2010.

Homeowner's Exemption
This is a deduction of $7,000 from the "accessed value" and applies only to owner-occupied properties. Once you've purchased a home you will receive a card to fill out to apply for the exemption. The card must be completed and returned between March 1st and April 15th. Applications submitted after April 15th, but before the end of the year will qualify for only 80% of the exemption.

Supplemental Tax Bill
Boy can this one cause problems. Yes, the tax assessor reassesses the property when it is sold, but they don't always get the new tax bill amount "into the system" in a timely manner. The first tax bill that many buyers mistakenly receive is one which reflects the rate for the previous owner. So you get this bill, and think, "Wow the taxes aren't as high as I thought", pay the bill, send it off and think you are done. Wrong. Expect that you will get another tax bill, this one called the Supplemental Tax Bill. It will cover the difference between the old rate (which you already paid) and the new rate (which you really owed).

For more information on this topic go to The Orange County Auditor-Controller’s site at: http://www.ac.ocgov.com .

 

Where Do My Tax Dollars Go?

The largest share of all Property Taxes supports school districts – about 53%.

  • Due to new property tax legislation effective for the 2004-2005 fiscal years, the County and the cities will receive property taxes from the schools’ allocation to replace local sales taxes and vehicle license fees transferred to the State. The State is required to backfill the schools’ revenues.

The Cities currently receive about 19% of Property Tax Revenue.

The County of Orange currently receives about 11%.

  • Orange County receives the lowest share of Property Tax in the entire state of California.
  • One percent (1%) of the County’s funds supports the County Library, a non-general fund department.

The Community Redevelopment Agency receives about 8%.

Special Districts receive approximately 9%.

  • The Orange County Fire Authority is included with the Special districts.

For more information on this topic go to The Orange County Auditor-Controller’s site at: http://www.ac.ocgov.com.

 

About California Proposition 13

Prop 13, officially titled the "People's Initiative to Limit Property Taxation," was a ballot initiative to amend the constitution of the state of California. The initiative was enacted by the voters of California on June 6, 1978. It would eventually be upheld as constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is embodied in Article 13A of the California Constitution.

Its passage resulted in a cap on property tax rates in the state, reducing them by an average of 57%. In addition to lowering property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases in all state tax rates or amounts of revenue collected, including income tax rates. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States. Passage of the initiative presaged a "taxpayer revolt" throughout the country that is thought to have contributed to the election of Ronald Reagan to the presidency in 1980.

Since Prop 13 California legislators have enacted new propositions (Prop 60, 90, & 110) which complement and extend the benefits of Prop 13 to California property owners of age 55 or older wishing to ‘downsize’ to properties located within California or persons of any age in California who are severely and permanently disabled. More information on Prop 60, 90, & 110 is located under the button "Information for Sellers" on this web site.

 

About Living Trusts

“Living Trusts” provide an optional manner in which to hold title to real property that provide the property owners (the Trustees) several financial benefits. Estate planners often recommend Living Trusts as an important element of an overall financial strategy for asset preservation and tax avoidance. Always seek counsel from knowledgeable professionals such as a CPA or tax attorney when you have specific questions about Living Trusts. Below are answers to a few commonly asked questions.

Q. Why would I want to form a Living Trust?

A. The common reasons for holding property in Trust is to allow the Trustees (usually a husband and wife) to minimize or postpone death taxes, to avoid a time consuming and legally expensive probate, and to shield property from attacks by certain unsecured creditors. Married persons can usually exempt a significant part of their assets from taxation and may postpone taxes after the first of them to die passes.

Q. There are several different ways to hold title to real property. Is a Trust the best way to hold my real property?

A. Only your CPA or tax attorney can or should answer this question.

Q. Who are the parties to a Trust?

A. A typical trust is the Family Trust in which the Husband and Wife are the trustees and, their children are the beneficiaries. Those who establish the trust and transfer their property into it are known as Trustors or Settlors. The settlor’s usually appoint themselves as Trustees and they are the primary beneficiaries during their lifetime. After their passing, their children and grandchildren receive distributions directly from the trust if it is to close out.

Q. Why is it called a Living Trust?

A. The Living Trust is created during the lifetimes of the Settlors (as opposed to being created by their Wills after death) and usually terminates after they die and the assets held in the Trust are distributed to the beneficiaries.

Q. Can a Trust hold title to Real Property?

A. No. Trustees hold property on behalf of the trust.

Q. Can I “homestead” property which is held in trust?

A. Yes, if the property otherwise qualifies.

Q. Can a Trustee borrow money against the property?

A. A Trustee can take any action permitted by the terms of the Trust. The typical Trust Agreement does give the Trustee the authority to borrow and encumber real property. However, not all lenders will lend on a property held in trust, so check with your lender first.

 

Expected Return on Investment

on Home Remodeling Projects

Every year Remodeling Magazine publishes a report that reflects the costs, resale value, and expected cost recovery percentage for a detailed list of common mid-scale and up-scale remodeling projects. The link below will take you to the section of the report for the Los Angeles and Orange County area. As you will see from the report window replacement projects and minor kitchen remodels returned over 100% of the project cost at resale according to this years survey and report findings for this part of the country.

http://costvalue.remodelingmagazine.com/pacific.html

Note from Curt & Joanne:

If you would like us research and post answers to specific real estate related questions please send us an email at chivers@usa.net or call us at (714) 713 3030.