California Real Estate: What the Assessor Won't Tell You About the Proposition 8: Decline in Value Exemption
When the real estate market is going down like it is now and has gone below your assessed value, you are allowed a break in your property taxes. Prop 8 Exemption is an exemption to Prop 13 which determines all property taxes today for homeowners in California. Prop 13 was enacted in 1978 to control the property taxes paid by property owners. Prop 8 Reduction is an exemption to Prop 13 which says that your property tax value should not be higher than the current market value.
This appears to be great information yet, it is only a TEMPORARY answer. Prop 8 is usually something you have to file for. The way Prop 8 works is like this: your date for the current fiscal year is January 1st for your property taxes. So, the comparable sales for your property for this exemption, need to have closed within the first quarter of the given year; January 1 to March 31 based on the language of the law. So to get a The Prop 8 Exemption reduction for 2009, the comparable sales need to have closed between January 1st, 2009 and March 31, 2009. To qualify for this reduction in value there has to be comparable sales of properties similar to yours within the first quarter of the designated year that are lower than your assessed value for that year.
This is a major problem for many reasons: one of the most significant is that the first quarter of the year has the fewest comparables because those sales started during the holiday season which is the slowest time for real estate, no matter what type of market we're in. Real estate sales take 30-60 days to close, so most of the sales that close within the first quarter of the year opened escrow during the holiday season. The comparable sales to choose from are much less than later on. When the decline really starts to show during the second and third quarters of the year you can't use those sales for a Prop 8 reduction.
The reason why this is not the best solution is that it is only a SHORT TERM reduction in value, as I stated earlier, so when the market starts to climb back up your old assessed value gets restored to what it would have been if it trended normally and you never had the reduction. Many alleged tax specialists pop up in declining markets often sending you mail claiming to be able to save you on property taxes. Unfortunately, homeownersoften pay good money to have their taxes lowered only to have their tax bills revert to higher rates once the market recovers. The truth is you never have to pay the Assessor for any service or review of your value - you pay for that service with your property taxes already!
Let me illustrate the way Prop 8 Exemption works on an average residence in California. I bought a residence in 2005, at the hight of the market, for $500,000, at a 2% trend my current assessed value for 2008 is $530,604. My market value as of the beginning of 2008 is around $430,000 and since I am a knowledgeable homeowner I apply for a Prop 8 Reduction to get a break. So, for 2008 I have a break, Im paying on a value that is $100,000 below my trended base value and saving near $1,250! The real estate market goes down and based on the Assessors review, the Prop 8 Decline value is given for 2009 also. So for 2009 I am paying based on the $430,000 which is even better this year since my trended base in 2009 would have been $541,216 and so I am saving around $1,390! Fantastic!
Well, the market starts to turn around, and the values are climbing and for 2010 my market value is around $500,000, so the Assessor adjusts my Prop 8 Decline value to $500,000 which is below my 2010 trended base value of $552,040. Definitely not as great as having $430,000 as my assessed value. However, I am still saving and this year since my Prop 8 Exemption value is $52,000 lower than my trended base value I am now saving $650 a year in paid taxes. Well, for 2011 the market is skyrocketing gain and now my market value is somewhere around $600,000 and so the assessor restores my value to the trended base, which for this year is $563,080. So, I am now paying $7,038 in taxes. I wish I still had that $430,000 base
There is a way in California to PERMANENTLY reduce your property tax base in today's declining market, utilizing Prop 13 and essentially bypassing the Prop 8 Exemption and all of its limitations. Additionally, find out how to avoid reassessments when you have inherited property and also how to utilize all the exemptions allowed by Current Property Tax Law.
About the Author: Valerie Faltas, Property Tax Expert has been involved in all facets of real estate for over ten years including assessments, appraisals, estates and trusts, investing and much more. She is a Certified Property Tax Appraiser, Licensed Residential Appraiser and a member of the International Association of Assessment Officers. As a real estate investor and advisor she is well versed in all aspects of real estate. To contact Valerie Faltas go to her website: www.propertytaxlittleblackbook.com
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