Tax time is here and deadlines are popping up for income taxes, so I thought it might be a good idea to take this opportunity to discuss property taxes and how they work as well.
The first thing to understand is that property taxes are annually, but are typically broken up into two installments. The first installment is due November 1st, and becomes delinquent if not paid by December 10th. The second installment is due Februrary first, and becomes delinquent on April 10th.
HOW MUCH ARE THEY?
Here in Los Angeles County, the rate of property taxes varies by the city. Some cities have broken off and incorporated, like Burbank, Santa Monica, and Pasadena for example. These all have their own tax rate separate from the City of Los Angeles, which neighborhoods like Encino, Sherman Oaks, and Studio City would all fall into. Currently, LA City taxes are billed at 1.220441%. The lowest tax rate in the county award goes to Bellflower, which is at a rate of 1.022843%
HOW DOES IT WORK?
When a home is purchased, taxes are billed at their taxable rate based off your purchase price. So say you buy a home for $1,000,000 in Sherman Oaks – your taxable value is $1,000,000 and your tax bill will be $12,204.41. Thanks to Proposition 13, every year thereafter, the max amount the the home can be assessed for a value increase is 2%. So – using the same example above of a $1M home – even if your home increases in value by $100,000 (10%), the max that the taxable value can increase would be $20,000 – or the next bill would be $12,448.50 (an increase of $245ish).
Now say that the previous homeowner had owned the home for 20 years and their taxable value was super low. Perhaps they’d bought it for $250,000 and since their value had been capped at the 2% increases, their current assessed value was only $378,916. That’s their original assessed value of $250,000 from when they purchased, plus 20 years worth of increases. Their tax bill levied for the year they sell would be much lower. In fact, their tax bill would be only $4,624.45 and not the $12,204 the new bill would be. As everyone knows – the government likes their money and they’ll be sure to notice the difference in new revenues so the new owners should expect that the tax bill will be revised. At their closing they might be asked as part of the escrow to pre-pay the old tax rate, but within the first year they will be issued one or two supplemental bills to cover the difference, rated per diem from their closing date.
Also, some people might wonder why their tax rate shows more than 2% sometimes. Well, bonds or direct assessments/special charges can be added/removed as they are paid off and are dealt with separately. So, for example, if a sewer line is being put in and billed to the residents of a neighborhood, a homeowner might see a special assessment for a few years until that has been paid off. Or alternatively, another example would be if the city has voted to include a bond to pay for the subway to be expanded, that bond would appear separately for a time being.
A NOTE ABOUT CONSTRUCTION
Purchasing a home isn’t the only time that your tax rate can change. From the Assessors website, “Los Angeles County and the 88 cities within the county are required to provide the Assessor with copies of building permits. The Assessor is, by law, required to value all new construction, regardless of a building permit being issued. Discovery of new construction may also occur when: 1. Information is volunteered by the public. 2. Assessor staff finds new construction while performing routine field checks. 3. A property transfers ownership and new construction is reported.”
So in other words, the tax assessor will typically use building permits to know about a change in taxable value – but sometimes they can be found with field checks as well. As an example, if you own a 1000 SF house, and decide to build on and double the size of the home, the new taxable value will be based off your new 2000SF home and they can reevaluate the value of your home then. In other words, even if your $1,000,000 Sherman Oaks home was only 1000SF, when you build it out and make it 2000SF, the tax assessor could determine the new size makes it worth $1,500,000 and your taxable value will be changed even though the homeowner has not sold.
Something else to note: updating/renovating existing square footage will likely NOT change your taxable value because even though it’s been updated, it’s age is still determined to be mostly the older age. That being said, if it has been deemed to be mostly new, it could be considered for a taxable value increase. These are determined by a case by case basis and should be verified with the contractor and assessor. For a great guide on construction and taxes, please refer to the Guide to New Construction via the Tax Assessor’s office which can be found here: http://assessor.lacounty.gov/wp-content/uploads/2015/02/E-36P.pdf
I am most definitely not a tax professional so please ALWAYS refer to a tax professional first to verify any/all information and how it applies to you. Also, a great resource is the Assessor’s website at http://assessor.lacounty.gov/ or the Property Tax Portal at http://lacountypropertytax.com/
If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.