Real estate tax is an important consideration for investors, landlords, and property managers. A thorough understanding of California property taxes can help you avoid unwelcome surprises at tax time.

This guide will teach you about property tax rates, exemptions, and who pays transfer taxes. We’ll also dive into the history behind Proposition 13, which defines how your property taxes are calculated and reassessed.

What is Real Estate Tax?

Real estate tax is a state levy that requires property owners to pay based on their land and building value. In California, there are a lot of laws surrounding property taxes, including how they are calculated, exemptions, and more.

The terms real estate and property tax are often used interchangeably but differ. Property taxes are the amount that your municipality charges you for the assessed value of your property.

In 1978, voters approved Proposition 13, which has three important functions:

• Setting base year values
• Restricting the rate of increase in assessments to 2% annually
• Limiting general property taxes to 1% of assessed value (plus voter-approved taxes)

The framework that Prop 13 set created a strong foundation for property taxation in California.

What is the Basic Levy?

The basic levy is the maximum amount a community can raise through property taxes. Communities usually adjust the levy ceiling annually based on market value changes.

The Franchise Tax Board can levy your assets and money if you miss property tax payments. A levy can affect your finances and ability to rent or sell your property. You can get your levy released by filing for hardship status or making a payment agreement with the FTB. The agency may also compensate you for charges incurred by levies issued in error.

What is the Basic Tax Rate?

California taxes its residents on various items, including income tax, state sales tax, property tax, and capital gains tax. State taxes are deductible up to $10,000 per year on federal returns.

The base sales tax in the Golden State is 7.25%, but cities and counties enact their rates on top of that.

Income taxes are progressive, meaning that the more you earn, the higher your rate. California has ten income tax brackets, with the top marginal rate reaching 13.3%. The state also collects a 1% tax on insurance premiums, which may lead to higher consumer prices.

What is the Special Assessment Rate?

Special assessment taxes are surtaxes that state and local governments or homeowners’ associations levy against property owners who benefit from specific local projects. These are typically billed as a property tax lien and have a lower interest rate than general property tax rates.

As a prospective home buyer, an assessment search is one of the most important steps before purchasing a property. This is because an unpaid special assessment can be passed from the previous owner to the new homeowner if it was decided before they officially became their homeowner.

What is the Secured Property Tax Bill?

Annual secured property tax bills are mailed by November 1. An account is sent for each owner of the record. A per-unit statement is also mailed for apartment buildings, small homes and coops/condos.

The real estate tax in California is an ad-valorem tax on real property, including the land and attached structures. It includes taxes levied for voter-approved bonds and direct assessments. 

What is the Homestead Exemption?

Due to California Assembly Bill 1885, homeowners have more homes and equity protected from creditors. The exemption is based on your county’s median home sale price in the previous year and is automatically adjusted for inflation.

The homestead exemption allows for a certain amount of protection against creditors for homeowners who experience financial trouble such as bankruptcy, divorce, or the death of a spouse. The homestead can also protect your home from lien creditors. This is because the creditor needs help to acquire funds within your homestead to settle past-due debts.

What is the Homestead Transfer Tax?

There are different transfer taxes at the state, county and city level. Real estate agents with local experience are best equipped to help their clients understand which fees they are on the hook for.

Homeowners can transfer a percentage of their Save Our Homes (SOH) benefit to a new property. This is called portability. It’s an important factor to consider when selling a home. This can result in significant savings for homeowners. This is especially true for seniors who have built granny flats in their homes.

What is the Transfer Tax?

A transfer tax is a transaction fee for selling real estate property. Depending on the jurisdiction, it is usually a percentage of the sale price or fair market value.

The money collected from these fees is typically used for local government purposes, such as repairing roads or paying employee salaries. The buyer and seller often split this cost during the negotiation process. However, who pays can vary by location and even by local custom. A real estate agent with local experience will be able to clarify these details for you.

What is the Transfer Tax Rate?

The rules and rates vary by state, county, and city. As a result, it is important to check local rates before signing a purchase agreement.

Several cities impose their own city real property transfer taxes on top of the standard county rate. These taxes are based on full value unreduced by encumbrances.

These taxes can be quite substantial, especially for larger transactions. Moreover, it is a growing concern that many cities are expanding their transfer tax jurisdiction in response to budgetary pressures. This trend will likely continue.

What is the Homestead Exemption Rate?

Homestead exemptions remove part of the value of your home from taxation, lowering your property taxes overall. They are generally automatically renewed as long as you reside in your home.

In addition to lowering your property taxes, the homestead exemption also protects you from creditors who attempt to force the sale of your property. The amount of protection from creditors varies by state, but most offer protections that range between $25,000-$500,000. These protections can also extend to surviving spouses in the event of the death of their partner.