Many of our clients, even those who have not recently purchased property, are now asking us about how to obtain property tax relief. For the past few years, residential and commercial property values have been falling annually as one of the worst real estate cycles in recent history continues. Santa Clara County Assessor Larry Stone recently stated that his county’s situation was “worse than anyone had expected,” and that his county “has not experienced such a devastating decrease in property values since the Great Depression.” And while many county assessors have performed select reviews of residential properties, very few have looked systematically at their roll values for non-residential properties.

This year, out of California’s dozen-largest counties, San Francisco was the only county to avoid a shrinking tax roll. Whereas other counties’ rolls were declining, San Francisco’s tax roll increased by 4 percent. It is unclear what drove these increases, although Assessor Phil Ting stated that in his opinion, “the overall real estate market in San Francisco has fared relatively well and remains strong.”

We advise taxpayers across the state to review both their real and personal property assessments very carefully. Under California law, property may not be assessed at a value greater than its fair market value. If property owners believe that their property is being overassessed, to protect their rights, they should file a timely appeal with the local assessment appeals board.

This article will briefly discuss California's local and state property tax systems and the factors taxpayers should take into consideration when deciding whether to appeal their property tax assessment.

Overview—Local Property Tax System. Unlike some states, California's local real property tax system is not based primarily on a property's annual market value, which may fluctuate from year to year. Rather, under Proposition 13, real property is assessed upon its “base year value.” For real property owned since the enactment of Proposition 13 (in 1978), the property's "base year" would be 1975, and the 1975 assessed value would be the "base year value." To determine the maximum taxable value for any year subsequent to 1975, a "factored base year value" is calculated, which is the base year value with annual increases limited to the inflation rate, as measured by the California Consumer Price Index, or 2 percent, whichever is less, until the property changes ownership or is subject to new construction.

At the time of a change in ownership or completion of new construction, the base year value of the property is re-determined. For changes in ownership, the property's fair market value on the change in ownership date becomes the new base year value. For new construction, the value of that new construction is added to the existing trended base year value to create the new base year value. A new "base year value" is established, which is then factored for each subsequent year, with the same limitation on annual increases as described above.

How is a Base Year Value Determined? What makes property taxes unique is that, unlike most taxes, which are based upon a taxpayer's declaration of value or income, property taxes are based upon an opinion of value established by the government. The person making this determination is often someone the taxpayer has never met, and who oftentimes has never actually toured the property. Although the assessor's office typically enrolls the purchase price as the assessed value, it may choose to enroll either a higher or lower amount if it determines that the property should have transferred for other than that amount.

Temporary Reductions. Although many appeals involve determining the proper "base year value" following a change in ownership or new construction, taxpayers often file appeals when the property’s value has declined below the trended base year value, called "Proposition 8" appeals. Under Proposition 8, taxpayers may ask for a temporary revaluation of their property if they believe that its fair market value has decreased below the factored base year value. Although these appeals technically apply only to the year at issue, the lower value established must remain on the roll for subsequent years until the assessor performs an appraisal and determines that the property's value has increased. Due to the continuing deterioration of both residential and commercial real estate markets, these temporary reductions are being sought by more and more property owners.

Overview—State Property Tax System. Section 19 of article XIII of the California Constitution requires that the State Board of Equalization, rather than the county assessors, annually assess certain types of property. These types of property include pipelines, flumes, canals, ditches, and aqueducts lying within two or more counties, as well as all taxable property, excluding franchises, owned or used by regulated railway, telegraph, or telephone companies, car companies operating on railways in the state, and companies transmitting or selling gas or electricity. The annual assessment process for state assessed property differs significantly from the local process. Not only are state assessed properties not entitled to the base year value protections of Proposition 13, but the assessment and appeal calendar are conducted on a separate timeline and before the State Board of Equalization rather than a county assessment appeals board. This process starts with the filing of property statements on or before March 1, although proactive state assessees can get involved in the determination of assessment factors prior to then. The State Board of Equalization issues annual assessments on or before June 1, and taxpayers who do not agree with their assessments may file appeals by July 20. During the remaining months of the year, the State Board of Equalization decides petitions and completes its roll by December 31.

Common Reasons for Appealing Assessments. There are many reasons to file an assessment appeal, but some are more prevalent than others. Some of the most common reasons are: (1) the market value has declined; (2) there was no change in ownership; (3) the assessor failed to enroll the purchase price or the purchase price exceeded the property’s fair market value; (4) contamination was discovered on the property; (5) the property is exempt; or, (6) the assessor overestimated the value of new construction that was completed, or included exempt property in that assessment. There are, however, many other very common reasons to appeal and even more uncommon reasons. If you think there is a reason that you might want to appeal, please feel free to contact us to discuss.

Estimating Tax Savings of a Property Tax Appeal. Estimating tax savings is relatively simple. The basic tax rate is one percent of the assessed value. However, the rate is generally higher due to voter approved indebtedness or contractual assessments. While actual rates vary from county to county, and even within a county, the general rule of thumb is that the overall tax rate is approximately 1.1 percent of the assessed value. Thus, for every $100,000 of assessed value, the tax burden is roughly $1,100 per year, and for every million dollars of assessed value, the tax burden is roughly $11,000.

When estimating the potential tax savings that may be recovered when appealing a base year value, estimate the difference between the subject property's actual fair market value and the assessed value, and multiply that value by the number of years that the taxpayer expects to own the property. If non-base year values are being appealed, perform this calculation for each year in which the assessed value is expected to be higher than the fair market value. For either of these calculations, consideration must be given to the 2 percent inflationary adjustment for each year after the first year of the appeal. Finally, because of the “pay first” nature of California property taxes, a successful appeal will typically result in a refund, upon which interest is paid.