Real Estate Taxes in California: What to Know Before You Buy, Sell, or Inherit

Owning a home in California is a dream for many, but navigating the state’s complex property tax system can feel like a nightmare. From the foundational rules of Proposition 13 to the recent changes brought by Proposition 19, homeowners often have more questions than answers. This guide is designed to demystify California’s property tax landscape, offering clear, straightforward information to help you understand your rights and responsibilities.

We’ll walk through how property taxes are calculated, explore valuable exemptions that can save you money, and explain how recent laws impact homeowners, especially seniors and those inheriting property. Whether you’re a new buyer, a long-time resident, or planning for the future, this article provides the essential information you need.

The Foundation: How Proposition 13 Shapes Your Tax Bill

The cornerstone of California’s property tax system is Proposition 13, a landmark measure passed in 1978. Its primary goal was to protect homeowners from skyrocketing property tax bills.

Here’s the simple breakdown of how it works:

• The 1% Rule: Prop 13 caps your annual property tax at 1% of your home’s assessed value at the time you purchased it. This is often called the “base year value.”
• Annual Adjustments: Your property’s assessed value can only increase by a maximum of 2% each year, tied to the rate of inflation. This prevents your tax bill from suddenly jumping, even if your home’s market value increases dramatically.
• Reassessment Events: The assessed value of your property is only reset to its current market value when a “change of ownership” occurs—meaning when you sell the property—or when you complete significant new construction.

Because of Prop 13, two neighbors in identical houses could have vastly different property tax bills. A long-time owner who bought their home decades ago likely pays far less than a new neighbor who just purchased their home at today’s market prices. As noted by real estate resource realpha.com, while the base tax rate is 1%, additional local taxes often mean the effective rate is higher, creating this disparity.

Understanding how Proposition 13 affects your business’s real estate portfolio is the first step. Creating a custom plan to manage these rules and protect your long-term goals is the next step. Call Bay Legal PC at (650) 668-8000. In your first, no-obligation meeting, we can explore your options and help you determine the right path forward for your holdings.

A New Era for Homeowners: Understanding Proposition 19 California Property Tax

California Property Tax Transfer for Seniors Over 55

Prop 19 provides a powerful benefit for homeowners who are over 55, severely disabled, or victims of natural disasters. It allows them to sell their primary residence and transfer its original assessed value to a new home anywhere in California.

Here are the key advantages:

• Move Anywhere in the State: Unlike previous rules that limited transfers to certain counties, you can now move to any of California’s 58 counties.
• Buy a More Expensive Home: You can transfer your tax base to a new home of any value. If the new home is more expensive, the difference in market value will be added to your transferred base value.
• Use the Benefit Up to Three Times: For most homeowners, this benefit can be used up to three times, offering significant flexibility.

This change helps seniors downsize or relocate to be closer to family without facing a massive property tax increase.

Changes to Inherited Property Rules

Prop 19 also significantly altered the rules for inheriting property. Previously, children could inherit their parents’ home and keep the low property tax assessment, regardless of how they used the property.

The new rules are much stricter:

• Primary Residence Requirement: To receive any tax basis protection, the heir must use the inherited home as their primary residence within one year.
• $1 Million Cap: If the home’s market value at the time of inheritance exceeds the parent’s assessed value by more than $1 million, the assessment will be adjusted upwards.

Any inherited property not used as a primary residence will be fully reassessed at its current market value. Financial insights from cnb.com highlight that this has major implications for families intending to use inherited properties as rentals or vacation homes.

Navigating Capital Gains Tax on Your Home Sale in California

• Exclusion Amounts: You can exclude up to $250,000 of gain if you’re a single filer, or up to $500,000 if you’re married and file a joint return.
• Eligibility Rules: To qualify, you must have owned and lived in the home as your primary residence for at least two of the five years leading up to the sale.

This is a federal tax exclusion that California follows. Any profit that exceeds the exclusion limits is taxed as income.