Understanding Property Taxes & Proposition 13 in California

Why property taxes surprise buyers

Property taxes are one of the most important and least understood costs of owning a home in California. They are shaped by Proposition 13, a 1978 ballot measure that changed how property is assessed. Understanding how it works helps you budget accurately and avoid unpleasant surprises after closing. This article offers a general overview, and you should confirm the details with the county assessor and a tax professional.

The basics of Proposition 13

Proposition 13 sets the base property tax rate at one percent of a property's assessed value. Local voter-approved bonds, parcel taxes and special assessments are added on top, so the total rate in many areas is higher than one percent, and it varies by location. Proposition 13 also limits how much a property's assessed value can increase each year, generally to a maximum of two percent, as long as the owner remains the same.

Reassessment at sale

The protection of the cap applies to the current owner. When a property changes ownership or is newly constructed, it is generally reassessed to its current market value. This is why two neighboring homes can have very different tax bills, because one owner may have held the property for decades while another recently purchased. When estimating your costs, base your calculation on your purchase price, not the seller's current taxes.

Supplemental tax bills

After a sale closes, the county assessor determines the new assessed value and may issue a supplemental tax bill. This covers the difference between the old and new assessed value for the remainder of the fiscal year, which runs from July 1 to June 30. It is separate from the regular annual bills, and it may arrive months after closing. These bills are usually not paid through escrow, so buyers should set aside funds in advance.

Exemptions and special rules

Several provisions can affect your bill:

• Homeowners' exemption. Owner-occupants can apply for a modest exemption.
• Transfers between family members. Rules changed with Proposition 19, which affects when parent-to-child transfers keep the original assessed value. The rules are specific, so consult a professional before planning a transfer.
• Transfers for older or disabled homeowners. Proposition 19 also allows eligible homeowners who are 55 or older, severely disabled or victims of certain disasters to transfer their assessed value to a replacement home under certain conditions.
• Special assessments and parcel taxes. Some neighborhoods have additional charges for services or infrastructure.

Transfer taxes

Transfer taxes are one-time charges when property changes hands. The county imposes a documentary transfer tax, and some cities add their own. In San Jose, a tiered transfer tax applies to higher-priced sales. Local rules and thresholds can change, and customs about who pays can vary, so ask your escrow officer for an estimate.

Escrow impounds

Many lenders require an impound account, also called an escrow account. Each month, a portion of your mortgage payment goes into this account, and the lender pays your property taxes and homeowners insurance when they are due. At closing, lenders typically collect an initial deposit. If taxes or insurance rise, your monthly payment may increase, and an annual analysis can result in adjustments. Ask your lender how impounds work for your loan.

What to expect each year

Property tax bills are typically issued once a year, with payments due in two installments, in the fall and spring. Late payments can result in penalties, so set reminders or use impounds.

Appealing your assessment

If you believe your assessed value is higher than the market value, you may be able to request a review. Decline in Proposition 8 value is a process that can temporarily reduce an assessment when market value falls below the factored base-year value. Check with the county assessor for current procedures and deadlines.

For investors

Investors should include reassessment risks in their analysis, particularly when buying property or acquiring interests in entities that own real estate. Consult a tax attorney or professional about structure and ownership changes.

Plan ahead

Understanding the taxes you will pay lets you build a more accurate budget. If you would like a detailed breakdown of estimated taxes and fees for a property you are considering, request my tax and fee breakdown guide.

Hong Thi Kim Nguyen | CA DRE #02179975 | NMLS #1910694 | Century 21 Real Estate Alliance | Global Estate Hub LLC. This article is for general education and is not legal, tax, or financial advice. Please consult qualified professionals about your situation.