In the modern civilized world, taxes are something we’ve all heard about and most likely paid. Income taxes, sales taxes, excise taxes…There are all sorts of taxes one has to pay. Many people focus on income taxes that are paid to their federal and state governments but the truth is property taxes make up a large portion of the overall tax bill for many California taxpayers. A lot of local governments in California such as K-12 schools, counties, and community colleges get the base for their budget from revenue from property tax bills.
Property taxes play a huge rule in California’s finance but many elements of this system are quite complex and unknown to the public. This is why in this article we’re going to explain some important things about property taxes, such as how much is property tax in California, when are California property taxes due, what does the property tax bill include, and many more.
What’s on the property tax bill in California?
A lot of the taxpayer’s money goes on property bills so it’s good to know what the bill actually includes. The ordinary California property tax bill consists of five levies:
• The 1 percent rate which makes up for the largest charge in the property tax bill. It was established by Proposition 13 in 1978 and is the only rate that applies equally across every locality. It’s based on the property’s assessed value which is determined by a process, set by the California Constitution. There are, of course, exclusions to the general rule but in general, a property’s assessed value is its purchase price adjusted upward by 2 percent every year. The Constitution limits the 1 percent rate to, well, 1 percent of the assessed value. It’s pretty simple. That tax is a general tax which means that the revenue can be used for any public purpose. It’s also widely referred to as “the countywide rate”.
• Property assessments: This property tax is collected to fund the improvements made by the government that benefit property owners. The affected property owners can approve a change that the city or county is willing to make, such as new street lighting. Property assessment taxes are used to fund these improvements. Proposition 218 (1996) requires the funded improvements to be directly beneficial to the affected property owners. Usually, the assessments can’t be issued for services and facilities that are for the general public’s benefit, such as schools and public safety, even though they increase the value of local property. The local government needs to secure approval from the majority of affected property owners if they were to impose a new assessment. Each vote by the owners is weighted in proportion to the amount of the property assessments that he/she would pay.
• Mello-Roos taxes: This charge is a pretty flexible revenue source because it can be used to fund infrastructure projects or services, can levied in proportion to how much benefits it’s giving to a property or equally on all parcels or by other factors, and it’s collected within a particular area that’s mapped out by local government officials. The Mello-Roos taxes are frequently used to pay for public services associated with residential and commercial development.
• Additional taxes that pay for the local voter-approved debt. Just like the 1 percent tax, it’s ad valorem – this means it’s based on the assessment for the property’s value. Together, the 1 percent rate and the voter-approved debt rates comprise around 90 percent of the revenue from property tax bills in California.
• Parcel taxes: To impose this charge, the local government needs the approval of two-thirds of the voters. It’s a tax on all parcels under their jurisdiction and it’s usually a fixed amount per parcel or room or square foot of the parcel. The parcel taxes can be used to fund different local government services, even if they don’t provide direct benefits for the properties. However, the use of tax revenue is restricted to public programs and services that were approved by the voters.
Some local governments collect other fees, such as charges to clear weeds on properties where they are presenting a safety hazard, but they are diverse and mostly minor, so we’re not mentioning them here.
Like we mentioned already, property tax makes up a sizable portion from the tax payments in California. There are years when Californians have paid more property charges than they’ve paid personal income taxes, which is known to be the largest state General Fund source of revenue. All revenue from the property taxes remains within the county where it’s collected and is used only by the local government.
Here’s a fun fact though: even though most of the tax payments are property tax bills, the property tax rate is actually low compared to the national average. Thanks to Proposition 13 due to which property taxes are capped and there are several exemptions. California is one of the states with the smallest burden from taxes on property owners. That’s one of the many reasons it’s a great state for real estate investment.
Let’s talk in numbers: the average effective property tax rate in California is 0.77%. The national average sits at 1.08%. Of course, the average tax rate in California varies by county. If a property has an assessed home value of $300,000, the annual property tax for it would be $3,440 based on the national average. But in California, it would be only $2,310.
To calculate the rounded estimate of the property tax bill, you can multiply your property’s purchase price by 1.25%. A California homeowner ends up typically paying between 1.25% and 1.5% of the assessed value of the property.
Why are the property taxes in California so low? We mentioned Proposition 13 earlier, a law that was approved by California voters in the distant 1978. This law has two very important features – it limits the general property taxes to 1% of the property’s market value and restricts the increases in that assessed value to only 2% per year.
The ad valorem property taxes comprise almost 90% of the overall property tax bill. When you buy property, it’s assessed value is the same as the purchase price and it increases annually according to the rate of inflation. There’s the 2% cap on these increases which means that for many homeowners who have owned their property for a long time, the assessed value is lower than the market value. Same for homeowners in areas that go through rapid price growth recently, for example, San Jose. Real estate properties can only be reassessed when there is a change of ownership or when there are completed improvements that require building permits which is another reason why people who have owned their property in California for a long time don’t see a big tax increase due to the rising property values of the houses around.
Here’s a fresh tip: homeowners in California can save 70% annually by claiming a $7,000 exemption on their primary residence which reduces the assessed value by this amount of money. You only claim the exemption once and it should be not long after you buy the property. The due date is the 15th of February.
Now that we’ve established the price and essence of the property taxes in California, it’s time to talk about something of equal importance: when are California property taxes due? What good is it knowing how much is property tax in California if you don’t know when to pay it?
The fiscal year in the State of California runs from July 1st to June 30th. The property taxes are in the two equal installments which correspond to the halves of the state’s fiscal year. The first half covers the period of time from July 1st to December 31st and the payment for it is due by November 1st. It becomes delinquent on December 10th. If the payment is not received, regardless of postmark date, by 5 p.m. on December 10th there is a 10 percent penalty which keeps increasing substantially if it’s not fully paid by June 30th.
The second half of the installment applies to the period from January 1st to June 30th and is due on March 1st. The delinquent date is April 10th – that’s when the 10% penalty starts applying.
All of this applies to property tax bills in the state of California, however, there are many different specifics in every city and county. The effective property tax rates and the median annual property tax payment vary depending on the county. The effective tax rates in California are in general lower than 1% but it’s best to check independently for every county.
Orange County has a higher median home value compared to many of the other counties in California, so the median annual property tax payment is higher than most. However, the average effective property tax rate is quite low – only 0.68%. To understand in depth the specifics of property taxes and property management orange county, it’s best to contact one of the local professionalists – there are many Orange County property management companies and financial advisors that can help you make the best out of your investment in property.