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| Time to pay your taxes! |
I was reminded of this charming little act of political commentary last week while paying our first property tax installment due on our house in Palo Alto. The check was for a measly $980.38. Since we bought the house last November, the tax base hasn't been adjusted yet, so it was a cruel reminder of how little property tax the previous owners were paying on the house that they had owned for decades. When the county assessor eventually gets around to reassessing the property value, we'll be paying about ten times that amount. Crap. That's a lot of Scooby snacks.
Property taxes are one of those sneaky recurring expenses that you have to remember to factor in when calculating your home investment and total cost of ownership. It's not an insignificant line item, so it's worth understanding ways to optimize whenever possible. Below are some property tax questions I've asked and tips I've come across as a longtime Santa Clara County tax payer.
Umm...why am I paying 10x more in property taxes than my neighbor?
In 1978, California voters passed the "People's Initiative to Limit Property Taxation" aka Prop 13. Here's how it works:
- Your home gets taxed on the basis of it's assessed value. You begin with a "base year rate" value, which is the fair market value of your house at the time you buy it (generally your purchase price).
- Property tax may not exceed 1% of your property's assessed value, plus locally voted special taxes and city or district special assessments (in Palo Alto this comes out to ~1.25%).
- Your home's assessed value can go up no more than 2% per year unless there is a change of ownership or new construction, in which case the base rate value is reassessed.
TIP: Buy low andAfter buying a house, how long until my taxes go up?sell highnever sell. (See Prop 58/193 below).
It can take up to a year before the tax assessors get around to reassessing a property after a change of ownership or new construction, but don't worry they will come after you. When they do get around to reassessing your property, they'll send you a prorated bill starting from the day you made the purchase or completed construction. These are called "supplemental assessments" and they are based on the difference between the prior assessed value and the new assessed value. In the meantime, even if you don't receive a bill, you're still responsible for making all property tax payments on time (these are due every Dec 10 & Apr 10). You can view and pay your property taxes on the Santa Clara County website.
Are property taxes tax deductible?
Yes and no. For regular taxpayers, property tax payments are completely tax deductible from both federal and state taxes. There is no limit on the amount of the deduction but the tax must have been levied and paid during the tax year that you are claiming the deduction. The bad news is that property taxes are not deductible from federal taxes if you are subject to AMT (Alternative Minimum Tax), though the deduction is still allowed on your California income tax return.
Remodeling a house will generally result in a lower assessable tax base than a new home of the same size. Ultimately, a remodel done wisely can add more value to a house than what you'll end up being taxed for. Remodeling work is generally not assessable unless it adds new square footage, and unlike a new home, the reassessment will not involve a full blown appraisal with neighborhood comps. The assessed value of a remodeled house is determined by a standard square footage calculation. The county determines a "fair market value" for the square footage addition based on the Board of Equalization's cost tables.
How will my taxes change if I tear down a house and build a new one?
Are property taxes tax deductible?
Yes and no. For regular taxpayers, property tax payments are completely tax deductible from both federal and state taxes. There is no limit on the amount of the deduction but the tax must have been levied and paid during the tax year that you are claiming the deduction. The bad news is that property taxes are not deductible from federal taxes if you are subject to AMT (Alternative Minimum Tax), though the deduction is still allowed on your California income tax return.
TIP: When you purchase a new home prorated property taxes are usually part of the closing costs. Make sure that you remember to deduct this payment along with all the others when you file your taxes.In terms of property tax liability, is it better remodel or build a new house?
Remodeling a house will generally result in a lower assessable tax base than a new home of the same size. Ultimately, a remodel done wisely can add more value to a house than what you'll end up being taxed for. Remodeling work is generally not assessable unless it adds new square footage, and unlike a new home, the reassessment will not involve a full blown appraisal with neighborhood comps. The assessed value of a remodeled house is determined by a standard square footage calculation. The county determines a "fair market value" for the square footage addition based on the Board of Equalization's cost tables.
How will my taxes change if I tear down a house and build a new one?
Building a new house is like buying a new house except your land value remains the same. There are two parts to your assessed value--"land" and "improvements." When new construction is completed, the assessor will determine the fair market value of the improvements by looking at neighborhood comps or performing a walk through. The value added by the new house, less the assessed value of the home torn down will determine your additional tax burden. Your land value will not be reassessed and is still on the original base rate plus 2% per year schedule. For more info, here's a helpful FAQ on new construction and property taxes.
C'mon, there must be some clever ways to avoid taxes, yes?
Indeed, there are a number of legal ways to minimize your taxes. Below are some ways to prosper under the current rules:
Prop 8: Appealing for a lower tax assessment
Prop 58/193: Property tax base transfers to children or grandchildren
Prop 58, aka "the parent to child exemption" allows property to be transferred between parents and children without a reassessment of the property. If the children are no longer living, Prop 193 allows for this same transfer to grandchildren. As a result, families are able to pass on their lower property tax base from generation to generation. There are many conditions of around this transfer, so be sure to read through this FAQ for more details.
$589 parcel tax exemption for senior citizens in Palo Alto
If you're an owner-occupant over the age of 65 in Palo Alto, you can file for an exemption of the $589 Palo Alto Unified School District (PAUSD) parcel tax by filling out this form or applying in person. Complete details can be found on the PAUSD parcel tax page. The deadline to submit is May 31. This tax is in place until 2016. Remember that this money goes to our kiddies and local schools, so consider donating it if you have the means.
Prop 60: One-time transfer of your property tax base
If you are a homeowner over the age of 55, you can replace your primary residence with a new home of equal or lesser value and maintain the same tax base. This makes a lot of sense for longtime owners who have a low property tax base but would like to change homes or downsize. Here are some of the requirements:
Prop 60 allows qualifying homeowners to transfer their property tax base to another home in the same county. Prop 90 extends the Prop 60 property tax transfer benefits to replacement homes in other participating counties. As of January, 2012, the following eight counties allow inter-county base year value transfers:
P.S. If this kind of stuff floats your boat and you still want to learn more, I highly recommend you listen to this 2011 "KLIV Inside Silicon Valley" interview with Larry Stone. It's a surprisingly lively and informative conversation with our friendly neighborhood tax man. He'll give you an inside baseball look at the history of our county and tax system...and perhaps make you a little less grumpy when you get his yellow postcard in the mail this July.
How will I be taxed during the construction period?
Santa Clara County does its annual reassessments based on the value of your land/improvements on the lien date of January 1st. When there's construction on the property, the assessor will look at the "percentage of completion" on the lien date and apply it to the property value using cost tables devised by the state. If the project is 50% complete on Jan 1, you will pay property taxes that year for only half the calculated home value.
TIP: When doing a tear-down you can optimize for the lowest property taxes by demolishing the home by late December and having a empty lot on January 1st.
Does it make a difference if I leave one wall standing?
Leaving one wall standing will not result in lower assessed value. This is one of the biggest myths about property taxes. The county has a "substantially equivalent to new" designation that is applied to all homes that appear to be new even if part of the original house was preserved. There may be local zoning or permitting benefits to keeping a wall up, but the tax man will not be duped into giving you a discount. C'mon, there must be some clever ways to avoid taxes, yes?
Indeed, there are a number of legal ways to minimize your taxes. Below are some ways to prosper under the current rules:
Prop 8: Appealing for a lower tax assessment
When the market value of a property drops below the assessed value, the assessor is required to lower assessed value for that year. Proposition 8 allows property owners to appeal for lower tax assessments. The process costs $35 and your time to build a case and possibly present it in court. All property owners receive notification of their assessed value in the form of a postcard mailed by the county assessor every July. If you think that the fair market value of your property on Jan 1st of that year was lower than the assessed value on the card, you can start the appeals process by submitting an assessment appeal application. It is due by September 15, see the Property Owner's Guide to Proposition 8 and the Assessments Appeals FAQ for more details.
The next few tips are mostly applicable to my golden years readers. However, they are worth knowing if you have parents who live in California since there are smart estate planning strategies that can take advantage of these benefits.TIP: If you bought during a boom time (e.g. this year), watch the market closely to look for signs of a slow down. If you can find recent neighborhood comps (as close to Jan 1 as possible, but no later than March 31) that are lower than your assessed value, you can make a case for a reduction. They may dismiss your initial request, in which case you will need to file for a formal appeal and court date. I did this for my Palo Alto condo in 2002. While I hated the idea of going to court, I was unemployed at the time so I decided it was worth pressing for whatever I could get. My real estate agent helped me gather comps. You can now easily get this kind of info from sites like Redfin, Zillow, Trulia. Much to my surprise, the appraiser called me a week before my scheduled court date an offered a lower appraised value. I happily agreed and my taxes were reduced. Apparently, appraisers don't like to go to court either. The next year they proactively lowered assessed values across the county. I was happy that I got an extra year of savings by being persistent.
Prop 58/193: Property tax base transfers to children or grandchildren
Prop 58, aka "the parent to child exemption" allows property to be transferred between parents and children without a reassessment of the property. If the children are no longer living, Prop 193 allows for this same transfer to grandchildren. As a result, families are able to pass on their lower property tax base from generation to generation. There are many conditions of around this transfer, so be sure to read through this FAQ for more details.
If you're an owner-occupant over the age of 65 in Palo Alto, you can file for an exemption of the $589 Palo Alto Unified School District (PAUSD) parcel tax by filling out this form or applying in person. Complete details can be found on the PAUSD parcel tax page. The deadline to submit is May 31. This tax is in place until 2016. Remember that this money goes to our kiddies and local schools, so consider donating it if you have the means.
Prop 60: One-time transfer of your property tax base
If you are a homeowner over the age of 55, you can replace your primary residence with a new home of equal or lesser value and maintain the same tax base. This makes a lot of sense for longtime owners who have a low property tax base but would like to change homes or downsize. Here are some of the requirements:
- The seller or spouse living in the home must be at least 55 years old when the original property is sold.
- Both the old and new properties must be in the same county. (See Prop 90 for exceptions).
- Both the original and replacement properties must be your primary residence and eligible for the homeowners' exemption or disabled veterans' exemption.
- The replacement property must be of equal or lesser "current market value" than the original property (up to 105%-110% of the original property's sale price).
- The replacement property must be purchased or built within two years (before or after) the sale of the original property.
- Application for tax relief must be filed within 3 years of the purchase (or completion of construction) of the new home.
- If you file for this benefit, the original property will be subject to reappraisal at its current fair market value (therefore you cannot transfer the original house with its tax base to your children).
- This is a once in a lifetime benefit. Once you have filed and received this tax relief, neither you nor your spouse can ever file again (even in the case of death or divorce).
Prop 60 allows qualifying homeowners to transfer their property tax base to another home in the same county. Prop 90 extends the Prop 60 property tax transfer benefits to replacement homes in other participating counties. As of January, 2012, the following eight counties allow inter-county base year value transfers:
- Alameda, El Dorado, Los Angeles, Orange County, San Diego, San Mateo, Santa Clara, and Ventura
"You could not devise a more unfair property tax system if you tried." — Larry Stone, the Santa Clara County assessor (Source: The Bay Citizen).There's a lot more to read if you want to get into the history and politics of Prop 13, I think Larry's quote pretty much sums it up. Happy tax day, everyone!
P.S. If this kind of stuff floats your boat and you still want to learn more, I highly recommend you listen to this 2011 "KLIV Inside Silicon Valley" interview with Larry Stone. It's a surprisingly lively and informative conversation with our friendly neighborhood tax man. He'll give you an inside baseball look at the history of our county and tax system...and perhaps make you a little less grumpy when you get his yellow postcard in the mail this July.
