2020 Could Signal a Change in Property Taxes for Californians

Filed under: Real Estate Law

Lawmakers are currently considering a significant change to Prop 13. This tax law was originally created in 1978 to offer California residents property tax relief by limiting the tax rate. If the proposed initiative passes, commercial property owners will be affected by a new property tax structure.

The initiative would treat California commercial property differently than residential property using a concept known as “split roll.” Under the proposal, business would have their properties reassessed to market values every three years or less. Commercial properties would still be taxed at 1 percent of their value. Nothing would change for residential properties.

Before Prop 13. Prior to Prop 13, property taxes throughout the state amounted to about three percent of market value. Without limits on property tax increases and ad valorem charges, properties could be reassessed at any time. Owners often saw their property values, and therefore their tax bills, increase by fifty to even 100 percent in just one year.

Prop 13 reform limited tax assessments. When Prop 13 passed, property values were rolled back and frozen at 1976 values. Increases were limited to no more than two percent per year, except when a property was sold. Upon the sale of a property, it would be reassessed at one percent of the sale price with the two percent annual cap applying to future years. This allowed new owners to accurately gauge their future tax expense.

While residential properties tend to change hands every few years, allowing for continual reassessments, commercial properties often remain under the same ownership for decades. Stagnated taxes on commercial properties theoretically resulted in a loss of potential revenue for the state.

How the proposed repeal would affect California property owners. Lawmakers have proposed changes to Prop 13 in 2020, an idea that is backed by approximately 54 percent of voters (according to polls). The change would allow commercial and industrial property values, and therefore taxes, to be reassessed every three years instead of only when the property changes ownership.

The intent is to generate billions of dollars of tax revenue, which would then be funnelled into the state’s schools and local governments.

Potential downside of Prop 13 repeal. Detractors of the repeal say that local governments, lacking the appropriate staff to perform property value reassessments, would likely become backlogged for many years. Additionally, displeased commercial property owners will be motivated to contest reassessments in court, leading to legal entanglements.

For more information on the potential ramifications of Prop 13, contact our real estate attorneys for additional assistance. We can help you understand how the repeal could affect you, and inform you of your legal options.

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