Lower Property Taxes are only Temporary
Property tax bills on many homes in Santa Clara County are lower now than in 2006 because of the decrease in property values. However, many people are not aware that this reduction in tax is only temporary.
Under Prop. 13, a baseline value is established when you purchase your house. As property values increase, the law limits the growth of your assessed value to a 2% annual increase. If values drop below your baseline value, then you will be assessed at fair market value (i.e. current value). If property values go up, then you are assessed at your baseline value.
Today, with property values having come down, many taxpayers property is worth less than what they paid for it. Hence, their property tax will be based on current values (which is lower than their baseline value). However, as property values increase, their taxes will go right back up to their baseline value. This increase is not limited to the 2% annual growth. That only applies to baseline value.
There is a way to stop this increase and lock in the lower baseline value. Clients need to do a ""Change of Ownership" within the California Revenue and Taxation Code rules.
If you follow the rules properly, clients will be able to create a new, lower, baseline value for their property. This will permanently lower their property tax bill now, but also lock in the future growth of their assessed value to the 2% annual increase.
These rules apply to your primary residence. However, they also apply to all other real property you own in the state of California. If your client owns a commercial property, or an apartment complex, or any other real property that has significantly declined in value over the last couple of years, this strategy may be appropriate for them.
Take for example, the client who purchased a property in Palo Alto for $2,000,000 in 2006. It's current value is only $1,500,000. Based on a tax rate of 1.25%, the tax difference between these values is $6,250 a year. However, as values rise, the clients taxes will go right back up to their baseline value of $2,000,000. Implementing this strategy will allow the client to save $6,250 a year and make the $1,500,000 their baseline value. This will save taxes this year, and every year after that since the $1,500,000 will only be able to be increased by 2%. It will take 15 years before the assessed value returns to its prior level of $2,000,000. That's a lot of savings.
