In the world of real estate speculation, little goes as planned. Speculators cashing out hard-pressed sellers occasionally receive a Notice of Proposed Escape Assessment from their county assessor’s office. This notice informs the property owner of an impending correction to an incorrect assessed value on a property tax notice.
An escape assessment on a parcel of real estate means an adjustment will be made to the property’s assessed value. As a result, the property owner will have to pay higher property taxes.
But how is this possible? Under Proposition 13, a property’s assessed value is the market value at the time of the change of ownership. Also, Proposition 13 limits increases in assessed value to a maximum of 2% per year until the property changes ownership. [Calif. Constitution Article 13A §§1(a) & 2(b)]
However, does “market value” always equal the purchase price paid at the time the property was acquired?
A property’s base year value for assessments is the property’s full cash value on the date of the last change in ownership or completion of new construction, according to policy set by the California Department of Tax and Fee Administration (previously known as the State Board of Equalization). Assuming that the purchase price is always the assessed property value is a common misconception.
The purchase price is recognized to be market value and set as the assessed value only if:
- the transaction was an “arms-length,” open market transaction; and
- the assessor’s office was notified of the purchase price by a timely filed Preliminary Change of Ownership Report or a Change of Ownership Statement (recorded deed). [Calif. Revenue & Taxation Code §480]
If both of these conditions are met, the county assessor will set the property’s base year value at the purchase price. However, when evidence indicates the property value is at least 5% more or less than the actual sales price on an open market transaction, the assessor can adjust the assessed value to the “market value”. [18 Calif. Code of Regulations §2(b)]
- the assessor’s office not assessing new construction in a timely manner; or
- the property owner building an addition without obtaining a building permit, thus, the assessor’s office was not made aware of the new construction.
If any property has escaped assessment, the assessor will reassess the property at its value on the lien date for the year for which it escaped assessment. The reassessment is also subject to the tax rate in effect in the year of its escape.
A Notice of Proposed Escape Assessment will be given to the property owner by the assessor as a prerequisite to enforcing an escape assessment. Without the notice, the escape assessment cannot be levied. If an escape assessment is levied without prior notice, it is invalid. Additionally, the notice must be served within four years of the incorrect assessment. Generally, an escape assessment cannot be made outside that period. [Rev & TC §§531.8, 532]
However, the four-year limit does not apply to escape assessments caused by the property owner’s failure to report the information required. This includes any assessment resulting from an unrecorded change in ownership when a change in ownership statement or a preliminary change in ownership report is not filed. In this case, the escape assessment can be made within eight years of the assessment year in which the property escaped assessment or was under-assessed. [Rev & TC §§ 441, 532 (b)(2)]
Since escape assessments always deal with the value that should have been assessed, additional taxes for past years will be due. However, the current owner is not responsible for taxes on an escape assessment for the period of time before they acquired the property.
If the property owner does not agree with the escape assessment, they may appeal the assessment with the county assessor’s office. The owner has the right to appeal either:
- the enrollment of the escape assessment; or
- the value established for the escape assessment.
The owner can request an informal review to discuss the basis for the new value, and provide information relating to the value of the property. However, differences over the valuation of property that cannot be resolved by discussion with the assessor’s office are directed to the Assessment Appeals Board.
If you or your clients are investing in below-market value property, keep records regarding the property’s condition and document your evaluation of it at the time of acquisition. This may provide the information needed for a successful appeal if an escape assessment is imposed.
This article was previously posted in 2013, and has been updated.