Property Tax: An Opportunity During A Downturn

Due to the downturn, real and personal property values have diminished substantially, creating the potential for property tax savings. If you own any property that is subject to property tax, you should consider whether you are a suitable candidate for a reduction. The county property tax in California is assessed on all nonexempt real estate including commercial buildings, industrial buildings, homes, raw land, mobile home parks, and various possessory interests, such as airport and harbor leases with governmental agencies. Counties also levy property taxes on certain personal property which would include, for example, manufacturing and business equipment, aircraft, boats and so forth.

Normally, a change of ownership is an event which will result in an increase in property tax, since this is when real property can be reassessed (increases are otherwise limited under Proposition 13 to 2 percent a year for real property). But because of the reduction in property values, change of ownership may result in a reduction in valuation. Of course, it is not necessary to actually trigger a transaction to take advantage of a property tax reduction since the assessor is required to assess at the lower of (a) the base year plus a 2 percent increase per year or (b) the current fair and market value. Keep in mind that the base year is the fair market value at the time of purchase or the value during the 1975-1976 fiscal year if purchased before this date. The assessed tax equal to 1 percent (plus any bonds or fees approved by the voters) of this value is then calculated. So, for example, if you bought your building in 2012 for $1 million and have been paying taxes on that value (plus a 2 percent increase) in 2013 and 2014, but in 2015 you had the property appraised at $800,000 (or determined it on comparable sales), then the assessor must reduce your value to $800,000, resulting in reducing your tax $200,000 and exceeding $2,000 in savings.

Appealing the value for commercial or residential space can often be accomplished by sending the notice form, and if the assessor agrees, you will get the reduction. Remember, it is not a one-year savings but could go on for many years.

As opposed to real property, personal property is reassessed every year and owners must be alert to decreases in value in excess of the normal depreciation schedules used by the county. Owners must also exercise care in timely filing of their property tax returns to avoid late penalties.

If you miss the actual deadline, all property tax appeals — both real and personal — must be filed by that deadline for the year.

Personal property which is mobile, such as aircraft, poses special opportunities since, in addition to the valuation issue, the county may be required to allocate between California and other states. If the property is not in California for the entire year prior to the lien date, it may result in tax savings. In other words, if tax situs can be established in another state, the tax bill can be reduced.

As to possessory interests relating to real property leases with governmental agencies, not only are the fixtures and equipment valued and assessed, but the lease with the governmental agency must also be valued. For example, when negotiating for a new lease or upon renewal, tenants must be especially concerned about the rent since it will also affect the property tax valuation. Consequently, the higher the rent, the more valuable the lease appears and the higher the property tax.