What is Prop 13?

Proposition 13 (Prop 13), also known as the People’s Initiative to Limit Property Taxation, limits an owner’s property taxes to 1% of the property’s assessed value, or its current market value if less.  

From year to year, a property’s assessed value is adjusted upward starting at the property’s base value – the property’s fair market value (FMV) at the time of purchase – plus an annual inflation increase over the prior year’s assessed value set at the lesser of California’s consumer price index (CPI) figure or 2%.

However, it may change upon a reassessment by the county assessor. A reassessment only occurs upon transfer of title, even if the property’s FMV is substantially higher than its assessed value.

Additionally, a change of ownership resets the property’s base value to reflect the price paid by the new owners, leading Prop 13 to be called the “welcome stranger” law.

Related Articles:

Prop 13 explained

Tax Benefits of Ownership: Proposition 13 and the transfer of assessed value to a replacement residence

What transactions are excluded from reassessment?

When a transfer of title triggers reassessment, the property will be reassessed establishing a new base year value for the property equal to the market value (current price) of the property at the time of transfer. However, not all transfers trigger reassessment.

Common transactions which DO NOT trigger reassessment include:

  • a transfer solely between spouses [Calif. Revenue & Taxation Code 63];
  • a transfer between parent(s) and child(ren) [Rev & T C §63];
  • a transfer from grandparent(s) to grandchild(ren) where the parents of the grandchild are deceased [Rev & T C §63.1 (a)(3)];
  • a transfer between registered domestic partners [Rev & T C 62];
  • the replacement of a principal residence within two years of the sale with a replacement principal residence of equal or lesser value located in the same county or an accommodating county, by a person 55 years old or older [Rev & T C §69.5];
    • accommodating counties include Alameda, Los Angeles, Orange, Riverside, San Bernardino, Santa Clara, San Diego, San Mateo, Tuolumne and Ventura counties, which allow the assessed value figure to be carried forward to a replacement property in their county on the sale of a principal residence in another county;
  • the replacement of a principal residence by a person who is severely disabled [Rev & T C 69.5];
  • a title update to properly reflect the name(s) of the person(s) holding title to the property (for example, a name change upon marriage) [Rev & T C §62];
  • a change in title recorded only as a requirement for financing purposes, or to create, terminate or reconvey a security interest (e.g., cosigner) [Rev & T C §62];
  • the recording of a document to substitute a trustee of a trust, mortgage or other similar document [Rev & T C §62];
  • a transfer that results in the creation of a joint tenancy in which the seller (transferor) remains as one of the joint tenants [Rev & T C §65]; or
  • a transfer that returns the property to the person who create the joint tenancy (original transferor). [Rev & T C §65]

Further, the transfer of a co-owner’s interest on their death does not trigger reassessment when the deceased co-owner’s interest is transferred to the surviving co-owner, if:

  • the transfer is between two individuals who together own 100% of the property;
  • the transfer of interest gives the surviving co-owner a 100% interest in the property (thereby terminating the co-ownership); and
  • the co-owners have been co-tenants of the property, residing in it as their principal residence for at least one year preceding the transfer on the death of the co-tenant, signified by an affidavit signed by the surviving co-owner. [Rev & T C 62.3 (a)]

A common transfer which DOES trigger reassessment is a transfer between siblings. Also, be careful when dealing with transfers of partial interests as they may trigger reassessment. Advise your clients to seek legal advice prior to making any title or ownership changes if they are unsure if the modification/transfer will result in reassessment of their property taxes.

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California’s Prop 13 is broken

The pitfalls of Prop 13

For wealthy homeowners who have lived in their homes for many years, Prop 13 is terrific. In fact, the very reason for Prop 13’s creation was to protect elderly homeowners living on fixed incomes from losing their homes due to escalating property values/taxes.

Over the past few decades, Prop 13 has accomplished this – and more – at the expense of new homeowners and renters.

Some of the negative effects spread by Prop 13 include:

  • reduced sales volume, as current homeowners are incentivized to stay in their current home to keep their low tax rate;
  • new homebuyers – typically young families with less wealth than their more established neighbors – pay higher tax rates than their neighbors, who benefit from the same government services their property taxes support;
  • local governments need to make up for the lost revenue from property taxes by requiring:
    • higher income tax rates;
    • higher sales taxes; and
    • more business taxes, according to the Tax Foundation;
  • major loopholes allow for investors and businesses to take advantage of reduced property taxes – not the law’s intention; and
  • all of this lost tax revenue leads to lower quality government services.

Prop 13 could be changed to protect older homeowners from property tax increases, while eliminating the negative effects mentioned above. For instance, the law could cover only those in a certain income tax bracket, and/or those over a certain age.

However, it’s unlikely the law will change. Once property owners get used to a tax break, they won’t vote to eliminate it. Further, any changes to California tax law which result in an increase in taxes of any kind are required to be passed by a two-thirds majority in both legislative houses. [Calif. Constitution Article XIII Sec. 3(a)]

This article has been updated and was first published in September 2012.