Explainer: Property Tax in California
In California, property taxes are assessed by the county assessor's office in the county where a property is located. This is an ownership tax set by the voters of the state of California, and has nothing to do with the federal government, the president, or Congress.
Property taxes are imposed based on the “assessed value” of a property, which is usually determined by the purchase price of the property. Property owners receive a property tax bill each year that reflects the assessed value of their property and the applicable tax rate. Property owners can choose to pay their property taxes in two installments, due on December 10th and April 10th of each year.
Proposition 13, passed by voter initiative in 1978, is a landmark California law that limits the amount of property tax that can be imposed on a property to 1% of the property's market value at the time of purchase, with annual increases of no more than 2%. This means that even if the market value of a property increases over time, the assessed value (the purchase price) essentially freezes in time until the property is sold again. This is why each property owner on a given city block pays a different property tax rate, since each parcel was purchased at a different time at a different price. When a property is sold again, the assessed value is reassessed, and the property taxes are recalculated for the new owner.
Let’s use an example. If a home is purchased for $500,000, that becomes its assessed value. Under Prop 13, the property taxes would be calculated by imposing a 1% tax on the assessed value of $500,000, or $5,000. The property owner owes $5,000 per year in property taxes, and that amount can only be increased by 2% per year (~$100). So even if the property increases in market value to $2,000,000, the property owner still only owes $5,000 per year (plus increases) so long as they continue owning the property.
Property taxes are vital to a community. Most school districts in California are funded by property tax revenue. That’s a huge reason why you see well funded school districts where homes have a high property value. And conversely, you may see struggling school districts in neighborhoods with stagnant or depressed property values. Those “good” schools then further increase the desire to live in that school district, and consequently increase the surrounding property values in that neighborhood, to create an echo chamber of increasing property values and tax revenue. Property values, and by extension property tax revenue, go hand in hand with well funded school districts.
Up until recently, Proposition 58, effective since 1986, allowed parents to pass to their children their property tax rate. This was called the “parent-child exclusion”. The parent-child exclusion allowed children to inherit property that often had a market value in the millions but only pay property taxes based upon the price their parents (and sometimes grandparents) paid for the property. So, in our example above, a child could inherit that property worth $2,000,000, and still only pay $5,000 in property taxes for their entire life. And then they could pass that property to their children with the same property tax rate! If the property was reassessed upon the inheritance, the property taxes would have shot up to $20,000 (1% of $2,000,000).
This all changed with Proposition 19.
Prop 19, passed in 2020 and in effect since 2021, limits the ability of children to inherit property from their parents without reassessment of the property's value. Under the new law, the property must be the primary residence of the giving parent, must be used as the primary residence of the inheriting child, and the difference in assessed value and the market value is capped at $1 million over the parents’ assessed value. Put another way, the parent-child exclusion is essentially eliminated unless multiple conditions are met. Prop 19 also allows homeowners who are over 55 years old, disabled, or victims of natural disasters to transfer their property tax rate from their existing home to a new home of equal or lesser value anywhere in California. This means that these homeowners can move without facing a significant increase in property taxes.
Prop 13 and 19 are the law of the land for California property taxes. While homeowners over 55 years of age will experience new flexibility in moving to a new home while paying the same property taxes, more inherited properties will be reassessed, thus increasing tax revenue to help defray the costs of allowing those over 55 to keep their tax rate. Proper planning on both fronts ahead of time is recommended to avoid any unnecessary increases in the costs of living for you and for your loved ones.