The declining values that the real estate market has experienced over the past three years have been a mixed bag for property owners. Although values have been down overall, savvy property owners have been able to trigger changes in ownership in order to lock in lower assessments in the future (Savvy California Property Owners May Want to Act Now to Permanently Reduce Taxes), investors with cash have been able to acquire properties at deep discounts, and even unsophisticated property owners benefited from reductions in the assessed value of their properties as assessors struggled to match property assessments to the plummeting fair market values. Indeed, during a period when there was relatively little data from comparable sales, assessors made significant roll reductions to recognize the declining market.
From the taxpayers’ perspective, assessed values have been moving in the right direction for the past three years — down. Thus, little scrutiny has been made to confirm that the reductions were in fact accurate. Now that the tide is turning, however, and values are creeping back up, the real work is about to begin as assessors start to increase values on hundreds of thousands of properties that were reduced during the market downturn.
When California’s voters passed Proposition 13 in 1978, the State’s constitution was amended to provide that, among other things, a “base year value” would be assigned to locally assessed real estate. The significance of the base year value is that it establishes the maximum value for which property may be assessed. And, importantly, a given property’s base year value cannot increase by more than two percent annually, unless the property is purchased by a new owner, encounters new construction, or experiences a so-called “change in ownership.” In other words, regardless of how fast the market value of a given property may appreciate, the property’s assessable value is limited to its base year value, which creeps up by an annual inflation factor capped at two percent.
As originally enacted, Proposition 13 overlooked the possibility of a decline in property values. So, in November 1978, Proposition 8 was introduced and passed to provide that property assessments may be reduced when there is a decline in market value. Thus, due to the combined effects of Propositions 8 and 13, the taxable value for locally assessed real property is limited to the lesser of its fair market value or its base year value. The Proposition 8 adjustments, however, are only temporary in nature and do not establish a new base year value for the property. Plus, for each lien date after the first lien date for which the taxable value of property is reduced pursuant to Proposition 8, the assessor is required to reappraise the property annually at its fair market value until that value exceeds the trended base year value. Consequently, if the market value of a property enjoying a Proposition 8 reduction returns to, or exceeds, its base year value in later years, its assessed value may be increased immediately back to the adjusted base year value — regardless of whether such increase exceeds the two percent annual inflation factor established by Proposition 13.
Based on the most recent economic forecasts, assessors and appraisers across the state are projecting that the recovery of California’s real estate market may take up to 15 years before values return to those seen during the 2005 – 2007 timeframe. Thus, although market values experienced a precipitous drop over the past few years, increases going forward are projected to be extremely slow. Consequently, property owners that acquired locally assessed real estate during the peak of the market and saw their property’s assessed value decline in the 2009 – 2011 timeframe, may not only expect higher property taxes going forward, but, for several years, those annual increases will not be limited to the two percent cap of Proposition 13 (at least until the property’s market value returns to its trended base year value).
As a practical matter, assessors and assessment appeals boards are projecting an increased workload for the next several years. Although taxpayers who received 20 – 30% reductions during the 2009 – 2011 timeframe generally were not protesting that their assessments should have been reduced even further, it will be a different story when assessed values start going up. Not only will there be greater scrutiny on assessed values (because taxpayers are more likely to challenge increases than decreases), but assessors are faced with the huge task of annually reappraising each property that received a Proposition 8 reduction until that property's market value exceeds its trended base year value. Indeed, the assessors’ increased workloads, coupled with the fact that most assessors are working at reduced staffing levels, suggests that properties being reappraised in the coming years due to prior Proposition 8 reductions may not receive a thorough analysis.
Consequently, as assessors start the process of increasing assessments on properties that were previously reduced, taxpayers are encouraged to pay particularly close attention to the value of their properties. Naturally, an independent appraisal would give a property owner a good sense of whether the subject property is assessed accurately. But, other alternatives are available as well. For example, taxpayers have the right to examine the assessor’s records, including the working papers and appraisal used by the assessor to determine the value of the taxpayer’s property. Thus, if a taxpayer believes its property may be over assessed, a good place to start the analysis is by reviewing the appraisal that the assessor used to set the assessed value. If the taxpayer does not agree with the assessor’s appraisal, then it may make sense to challenge that assessment either formally or informally (or both).
The vast majority of assessment disputes are resolved through negotiation with the assessor. Yet, if a formal protest is not filed, the taxpayer looses leverage, and will likely have to agree to any adjustment the assessor may/may not make. Thus, it often makes sense to file a protective appeal. The deadline for filing a formal protest of the 2012 assessed value varies from county to county, but will be either September 17, 2012 or November 30, 2012.