By Dennis Draeger
County of San Bernardino
Proposition 13, overwhelmingly approved by California voters in June 1978, is the basis for property tax assessment today in California and all of its 58 counties. Prior to the passage of Proposition 13, property taxes could increase dramatically from year to year based on the market value of the property. The tenets of Proposition 13 limits the tax rate to 1 percent plus additional rates necessary to fund local voter-approved bonded indebtedness. It limits the assessed value increases to a maximum of 2% per year on properties that did not undergo a change in ownership nor had completion of new construction. Proposition 13 placed explicit limitations on the power of government to impose additional property taxes and it requires real property to be assessed at its current market value upon a change in ownership and new construction is to be reappraised at its current market value as of its date of completion. Proposition 13 has been amended numerous times since 1978, resulting in several change in ownership and new construction exclusions from reassessment.
When Proposition 13 was originally enacted in 1978, it did not provide the assessor the legal authority to reduce assessments resulting from a decline in market value. California real estate was appreciating at record levels in the late 1970s so the drafters of Proposition 13 did not have the foresight or envision a need to allow assessors the ability to reduce assessments resulting from economic conditions, depreciation, damage, obsolescence, or other factors causing a decline in value. Proposition 8 was approved by the voters in November 1978 to remedy this oversight in Proposition 13. Proposition 8 allows the assessor to make temporary reductions to assessed values when property has been damaged or its value has been reduced by other factors suchas economic conditions. The assessor can recognize declines in value if the market value of the property on lien date (January 1st) falls below its Proposition 13 value, or stated otherwise, the value to be enrolled in any year is the lower of a property’s Proposition 13 value or its current market value.
During the mid-2000s, San Bernardino County experienced unprecedented appreciation in real estate prices in all areas of the county which resulted in double-digit increases to the assessment roll for years 2004 through 2007. The 5 High Desert cities and adjoining unincorporated areas showed a particularly robust increase in real estate prices with a corresponding increase in their assessed values for years 2004 through 2007, then stabilizing in 2008. The peak of the real estate market in San Bernardino County occurred in 2007, stabilized in 2008, and then began its steep decline. During the late 2000s, the 5 High Desert cities and adjoining unincorporated areas were especially hard hit with decline of real estate values and substantial decreases to the assessment roll. Beginning in 2008, the County Assessor’s Office began reviewing thousands of decline in market value requests and also proactively reviewed assessed values county-wide. Overall, more than 200,000 county-wide property values were temporarily reduced under the provisions of Proposition 8 and approximately $32 billion of assessed value was removed from the assessment roll for years 2008 through 2012.
The real estate market is now recovering in San Bernardino County, but some areas are recovering at a greater rate than others. This is particularly true in the High Desert area of San Bernardino County where some areas are recovering at a much greater rate than others as indicated by a comparison of median home prices between 2012 and 2013. Apple Valley, Hesperia, Victorville, Phelan, and Wrightwood (I disregard Yermo due to a small number of real estate sales) are showing strong signs of recovering. Adelanto, Barstow, and Pinon Hills median home prices are increasing but at a lesser rate than the other High Desert areas. Lucerne Valley’s median home price is flat and I do not place a great deal of weight on Newberry Spring’s 73% decrease due to limited number of real estate sales in that area.
For property owners, an increase in the market value of their real estate holdings is generally a good thing except when it comes to property taxes. Many property owners who had received Proposition 8 reductions since 2008 may see an increase in their 2013 assessed value, which will result in a slight increase in their 2013 property tax bill which they will receive next September. Proposition 8 reductions are temporary reductions that recognize the fact that the current market value as of a particular January 1st lien date has fallen below it Proposition 13 value. Once a Proposition 8 value has been enrolled, it is reviewed annually as of the January 1st lien date to determine if its market value is less than its Proposition 13 value. These Proposition 8 values can and do change from year-to-year as the market fluctuates and if an increase is warranted, the increase is not limited to 2%. which only applies if the property is assessed at its Proposition 13 value. Now with the real estate market in a recovery mode and the Assessor’s Office in the process of reviewing approximately 160,000 parcels that are under Proposition 8 status, we anticipate a significant number of parcels will see an increase in their assessed value. Let’s say for examplea single family parcel located in Apple Valley has a Proposition 13 value of $142,800 as of 1-1-2013. Last year for 2012 the property owner requested a Proposition 8 review and it was reduced to $106,000 as of 1-1-2012. It is now being reviewed for the 1-1-2013 lien date and market value is determined to be $125,750. This is an 18.6% increase from the previous year but it is allowable because properties under Proposition 8 provisions are not subject to the 2% annual increase limitations that apply to those enrolled under Proposition 13 provisions. Continuing on with this example, next year the assessor reviews the assessed value for the 1-1-2014 lien date and market value is determined to be $160,000. The assessor will reinstate the Proposition 13 value of $145,656 ($142,800 plus 2%) because in no case may a value higher than a property’s Proposition 13 value be enrolled. Once the parcel’s Prop 13 value is restored it will now be limited to the 2% increase, unless it changes ownership or experiences new construction.