Are you paying too much in Property taxes??

Every year, I can gauge what is trending in Real Estate by the questions I get from all of my great past clients. Property taxes are at the top of the list, mostly because they want to know if they are being properly assessed, how they are assessed and what their new taxes will be if they move. These are all easy questions to answer individually, and I am always happy to get them “comps” (recent sales like their home) to understand why they pay what they pay, and if it is indeed too much. Honestly, it’s rarely too much based on market value. Until this year when I learned something I never knew before.

To explain, it’s important to understand how our taxes are determined and changed when we go through a decline in value as we did in 2006-2012. I will keep it simple. There are always small exceptions to the rules but this will cover 98% of us. We all pay taxes based on what we paid for our house. If you bought your home in 2005 and it went down in value, you can file a form called a “decline in value review”, provide sales supplied by your friendly Realtor, and your taxes were reduced after being reviewed. I’ve helped hundreds of people do this. The idea is to pay taxes based on “market value”, not necessarily what you paid for the home if values did decline, which of course, they did. I recently had the opportunity to meet with new LA County tax Assessor Jeffrey Prang. Nice guy. Wants to bring the County’s outdated computer systems up to date and improve accuracy in valuations. Which, when I explain what is happening with the tax bills we all will receive by November 1, I suspect you will want that to happen too!

A lot of how your taxes are determined goes back to the old Proposition 13 that still affect what you and I pay today. In effect since 1978, most people think it allows people who live in their homes for a long time to not pay current valuations so they can “afford” to live there. This is certainly true. Proposition 13 specifically states that property taxes can be raised only 2% per year. If you bought a home in the 70’s or 80’s, and still live there today, you are likely paying taxes at a small fraction of today’s market value. If I sold you a home in Northbridge Valencia for $350,000 in 1997, you paid 1% of that $350,000 as the base rate for LA County and approximately another .25% for the “supplementals” that we all pay – for fire, flood, library, sewer etc. Everyone’s supplementals can vary a bit (especially if your neighborhood has a landscape district or even worse, expensive Mello Roos bonds), but we quote taxes as “1.25% in LA County”, and it’s pretty accurate. So that house you bought in 1997 had a base rate of $3,500 a year in property taxes, and if values rose (which they did, that house today is worth $700,000), the MOST your property taxes could go up is about $70 a year. Again, it’s design was to avoid taxing people out of being able to afford their home, even if the neighbor that just purchased is paying almost double. Everyone accepts that is what Proposition 13 provides.

What Prop 13 also says however, is if you had a decline in value and reduced your taxes over the last 8 or 9 years, when value go up again the 2% rule DOESN’T APPLY. In fact, according to Jeffrey Prang, the assessor is in the middle of restoring taxes in most cases to pre-recession levels, which may be fine if you live in Manhattan Beach or Silicon Valley. It will most definitely not be fine for many people in Santa Clarita. And that is exactly what came up on my radar this summer when clients called with their new valuations, which weren’t even close to what market value is. One client bought a triplex from me for $700,000 at the height of the market in Newhall. He had his taxes reduced in 2008 to a realistic $475,000, which was the value at that time. They’ve come up a bit, but still were assessed below $500,000…until this year. Market value today is about $625,000, but he has been assessed at $810,000! Worse, after examining why, they are using properties from the San Fernando Valley when properties in Newhall exist, they just aren’t using them! Another client with a home in Valencia had the assessed value raised from $565,000 to $880,000 and that isn’t close to current market value – which is about $700,000.

When I questioned Mr. Prang about this, he admitted that they use “averages” for areas to come up with values. Meaning, if they use the wrong homes to “average” you can be assessed to pay a lot more in property taxes than you should. Further, they have a 40,000 case backlog of appeals for new valuations already and you have to pay the new value until your dispute is resolved. Further, the amount of appraisers employed in the Sylmar field office is a fraction of what it needs to be, so it will likely be awhile before you can have your appeal reviewed if in fact your valuation is now TOO HIGH for today’s actual value. When I questioned him about using properties from 30 miles away when comps within a 2 mile radius were available, he admitted “that shouldn’t happen”. So here we go again, watch what your new tax bill says. If you had your taxes reduced in the last 9 years due to decline in value, REALLY check your new assessed value. If it is out of line, I have the forms in my office.

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