What this article adds to the conversation: An owner or buyer of historic property in need of TLC can reduce their property tax by entering into a restoration and property tax agreement with local authorities, called a Mills Act subsidy. Agents well-versed in the Act are able to offer advice on likely property tax savings when they market an historic home for sale.
Historic homeownership, a cultural event
A property owner or buyer of a qualified historic home is able to reduce their property taxes through the Mills Act Property Tax Abatement Program (MAPTAP). To assist brokers and agents, the local planning department has a readily available register identifying all historic homes in their jurisdiction for agents to accurately determine a property’s status. Agents are duty bound to know what the property is that they are marketing.
Owners of historic homes, including buyers, enjoy a reduction on property taxes in exchange for maintaining and preserving their home at building standards set by the:
- Federal Office of Historic Preservation of the Department of Parks and Recreation;
- S. Secretary of the Interior’s Standards for Rehabilitation; and
- State Historical Building Code. [Calif. Government Code §50280.1(b)(1)]
Qualified historic homes are privately-held residential property subject to property taxes that are registered in either:
- the National Register of Historic Places or located in a registered historic district; or
- any state, city, county, or city and county official register of historical or architecturally significant sites, places or landmarks. [Gov C §50280.1]
Most local governments participate in the Mills Act program. For example, unincorporated areas of San Diego County participate in the program, as do the cities of San Diego, Oceanside, Coronado, La Jolla, Carlsbad and others. However, some cities in San Diego County do not participate, including the cities of Bonita and Vista.
Further, while San Mateo County does not participate in the Mills Act, the City of San Mateo does. Therefore, to avoid any surprises, it’s best to check if your local government participates before assuming the Mills Act is available in your area.
Mills Act contracts
For property owners to participate, they (or their agent) agree to a 10-year contract, which calls for:
- preservation of the historic property, including the restoration and rehabilitation of the property to conform with historic standards;
- periodic examination of the exterior and interior of the historic property by the assessor, the Department of Parks and Recreation and the State Board of Equalization to ensure the property is being maintained at the standards agreed to in the contract;
- anyone acquiring ownership to be bound by the contract; and
- provide written notice of the contract to the Office of Historic Preservation within six months of entering into the contract. [Gov C §50281]
Annually, following expiration of the 10-year contract, it is automatically renewed for an additional year. To avoid the automatic renewal, the owner serves a notice of non-renewal on the agencies involved before 90 days prior to the contract’s expiration. [Gov C §50282(a)]
However, when the property owner does not perform the required work to maintain the property at the historic standards agreed to in the contract, the local government may cancel the contract. [Gov C §50284]
Further, on a cancellation, the owner incurs a penalty cancellation fee equal to 12.5% of the property’s assessed market value. [Gov C §50286(a)]
Historic home as a rental or owner-occupied home
Unlike traditional valuation methods for a home used by the County Assessor, the assessed value under the Mills Act is based on a variation of the income approach to value.
Further, the property is reassessed annually, resetting the assessed value without concern for a base-year value add-on for consumer inflation. This annual adjustment method, based on a capitalization rate, causes uncertainty about the amount of property taxes as they will likely go down in recessionary years and trend upward in recovery and boom time periods.
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The assessed value under the Mills Act is redetermined annually by treating the property as a rental, whether the owner is an:
- investor renting out the property for income; or
- owner who does not rent out the property and as an owner-occupant receives implicit rent.
Initially, the Assessor sets the rent amount a tenant pays to rent this home in the local market. The amount of rental income the property generates annually is established by a comparable marketing analysis (CMA). [See RPI Form 200-1]
Next, the Assessor estimates the operating expenses likely incurred to own and maintain the property as a rental property. Allowable expenses for operating the property include the cost of utilities, maintenance, repairs, insurance and property management. Any special assessments and special taxes are also included as expenses.
However, property taxes are not treated as an expense of owners for Mill Act valuation assessment, as they normally are under the income approach to evaluations. However, property taxes are recovered as a component included in the Mills Act capitalization rate set to calculate the property’s assessed value — not the property’s fair market value (FMV) a buyer pays. [Calif. Revenue & Taxation Code §439.2(a)(3)]
Next, the Assessor deducts the allowable operating expenses from gross rental income, without concern for a vacancy factor. This arithmetic results in the Mills Act net operating income (NOI) generated by the property. The NOI is the sole dollar figure used to calculate the property’s assessed value, as is traditional in appraising an income property’s FMV.
Next, the Assessor establishes the current year’s Mills Act capitalization (cap) rate for the property. A cap rate is the annual rate of future returns a prudent investor seeks to earn on their investment.
The cap rate for Mills Act property is a variation on a standard approach to setting a capitalization rate for a property.
The Mills Act cap rate is stated as a percentage of invested capital, which when applied to the property’s NOI sets the historic property’s assessed value of the property. The cap rate under the Mills Act is composed of a/an:
- mortgage interest rate component, which varies annually;
- amortization component;
- property tax component; and
- historic property risk component. [Rev & T C §439.2(c)]
The mortgage interest rate used to calculate the cap rate is published by the California State Board of Equalization by September 1 preceding each assessment year. The mortgage interest rate is drawn from market rates on conventional mortgages. For example, in 2024, the interest rate component was 7.25%. [Rev & T C §439.2(b)(1)
The amortization component is an annual depreciation and obsolescence recovery of capital invested in a rental property’s improvements, stated as the reciprocal percentage of the years of life remaining for the property improvements, say, 2% for 50 years remaining life, or 1.2% for 83 years remaining life.
The property tax component is included as an offset for the amount of property taxes excluded from the expenses used to set the property’s NOI. The component is based on the property’s current assessed value.
The historic property risk component is an additional annual recovery of invested capital, included since an historic property investment has a risk of loss not covered by the depreciation component.
Next, the Assessor divides the property’s NOI by the calculated capitalization (cap) rate. This arithmetic result sets the dollar amount of the assessed value of the historic property for the year. In turn, the Tax Collector uses the property’s assessed value — multiplied by the local property tax rate, say, 1.2% — to determine the property’s tax bill for year.
Now, consider two types of purchasers who may qualify under the Mills Act on acquisition of an historic home. First, we examine the investor purchaser of income-producing property. Then, the owner-occupant purchaser.
An investor’s analysis of historic property
Consider an income-producing property an investor acquires for $500,000 (its market value). The local property tax rate is 1.2%, meaning the investor’s first annual property tax bill will total $6,000.
As marketed by the agent, the property qualifies as an historic property for Mills Act property tax reduction. By entering into a contract with local agencies, its assessed value is based on an income approach as presented in the above reporting, not the price the investor paid for the property as its current FMV.
The property has a fair rent rate of $2,300 monthly; $27,600 annually, minus $4,000 in allowable annual expenses the owner incurs. By subtraction of expenses from income, the resulting net operating income (NOI) is $23,600 annually.
Next, to arrive at the assessed value, the NOI is divided by the Mills Act cap rate for 2025 ($23,600 / 0.1165). The math result is $202,600, which becomes the assessed value for the investor’s income-producing property. The property tax billing for the year 2025 as set by the Tax Collector is $2,431 (202,600 x 0.012)
With the new property value — and at the same property tax rate of 1.25% — the owner’s initial property tax bill is just $2,431, not $6,000. Thus, the amount of annual savings is $3,569 under the Mills Act.
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Whether or not an historic property is rented, property owners with backgrounds in construction, such as renovation, are best able to shield themselves against unanticipated future investment in the property needed to comply with the terms of the contract.
Owner-occupied historic home assessed as a rental
Now, consider an individual purchasing an historic home to live in. Like the example above, the list price is $500,000 and at the local property tax rate of 1.2%, will command an annual property tax bill of $6,000.
The property qualifies for property taxes set under the Mills Act when the homeowner and local government enter into a 10-year Mills Act Contract. The homeowner agrees to maintain the property and perform necessary repairs to bring the property up to historical conditions in exchange for an assessed value based on the Mills Act calculation.
The owner who occupies their property does not pay rent. As a result, the owner incurs an opportunity cost of forgoing rental income in exchange for the value of the occupancy by the owner, called implicit rent.
The assessor determines the annual rent amount the property will generate by an analysis of rents in comparable rental properties in the vicinity. A comparable annual rental rate for the property is determined as $27,600, or $2,300 monthly.
The owner’s total expenses for the first year’s ownership are $4,000. These expenses are then deducted from the gross income from rentals to produce the property’s net operating income (NOI) of $23,600.
The owner-occupant cap rate is composed of a/an:
- interest component of 7.25%;
- amortization component of 1.2%;
- 2% property tax component; and
- historic property risk component of 4%. [Rev & T C 1.9, §439.2(b)]
The historic property risk component for owner-occupied properties is 4%, compared to the 2% risk component for income-producing properties. These historic property ownership risk rates are set by statute.
Thus, the total cap rate is 13.65% and the new assessed value is $172,894 (23,600/0.1365).
Compared to the $6,000 tax bill for a home assessed at $500,000 (the property’s market value), the buyer will have an annual tax bill limited to $2,075 (172,894 x 0.012) the first year under the Mills Act contract.
Since they will be paying their tax bill monthly through an escrow account, this translates to a monthly savings of $327 per month.
The spirit of the law is for these homeowners to use property tax savings to maintain their home at historic standards. Historic homes do require maintenance, like all homes, but with more expensive replacements than homes without historic classification.
Realistically, the homeowner might view these savings as a way to extend their purchasing power, enabling them to purchase a more expensive home due to lower property taxes based on the historic property assessment treatment than a home without an historic designation.
In the case of an historic home that needs considerable work, the owner may also use their extended purchasing power to take out a rehabilitation mortgage. Or they will need to consider a cash reserve to pay for bringing the property up to historic standards required by their Mills Act contract.
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