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Your assessed value is the building's market value on the date it last changed ownership, raised each year since by an inflation factor that can never exceed 2 percent. It records what the building was worth then, run through a formula, and after a long hold it can sit far below what a buyer would pay today. A sale also resets the tax, so the property tax line on your own expense statement is the first number a buyer replaces.
- Revenue and Taxation Code section 51 sets the taxable value at the lower of the factored base year value and the building's market value on January 1.
- A sale resets the value. In an arm's-length sale the price is presumed to be the new value, and the buyer receives supplemental bills for the difference.
- A Proposition 8 reduction is temporary, and while it lasts the assessment can climb by more than 2 percent a year.
- The bill is the 1 percent general levy plus voter-approved debt rates that depend on the area, so no one rate fits every building.
- A buyer's NOI carries the buyer's tax at the new price. In the made-up example below, pricing from the seller's bill overstates the value by $440,000.
What the Assessor's number measures
Proposition 13 is written into the state constitution as Article XIII A. Under it, a property's base year value is its market value on the date ownership last changed. After that, Revenue and Taxation Code section 51 lets the Assessor add an inflation factor each year, taken from the California Consumer Price Index and capped at 2 percent. The same section makes the taxable value the lower of two figures on the January 1 lien date: that factored base year value, or the property's full cash value.
So the number compounds from an old starting point at a capped rate, while sale prices move with rents, borrowing costs and what buyers will pay, none of which has a cap. A made-up building with a base year value of $1,000,000 set twenty years ago can carry no more than about $1,486,000 today, because 1.02 compounded twenty times is about 1.486. Short of new construction, the assessment cannot go higher than that, whatever the building would sell for.
What resets the value
A change in ownership resets it. Section 60 defines one as a transfer of a present interest in real property, including its beneficial use, worth substantially as much as the fee interest, and a sale of the building is the plain case. When one happens, section 75.10 has the Assessor appraise the property at its full cash value on that date, and that figure becomes the new base year value. Completed new construction is handled the same way, with the new work valued on the day it is finished and given a base year value of its own.
The price is presumed to be that value. Under section 110, when the terms were negotiated at arm's length between a knowledgeable seller and buyer, neither able to take advantage of the other's circumstances, the purchase price is rebuttably presumed to be the full cash value. In an ordinary sale, then, the buyer's base year value starts at the price the buyer pays.
Some transfers leave it alone. A transfer between spouses, including one at a death, is excluded under Property Tax Rule 462.220. For transfers on or after February 16, 2021, the Proposition 19 parent-child exclusion covers only a family home or a family farm, and rental property does not qualify, so an apartment building left to a child is reassessed. Shaya is not an attorney, and whether a particular transfer resets the value, such as a partner's interest changing hands or a deed into or out of a trust, is a question for the Assessor or a property tax attorney before anyone signs.
When the value goes down, and back up
Proposition 8, a constitutional amendment voters passed in 1978, allows a temporary cut. When a property's market value on January 1 falls below its factored base year value, the Assessor enrolls the lower market value for that year. The figure is reviewed again each January, and once the market climbs back to the factored base year value, that value is restored.
The climb back is where the 2 percent cap stops protecting you. Section 51 still makes the Assessor enroll the lower of the two values, and while the lower one is market value it moves with the market, so the assessment can rise by more than 2 percent in a single year until it reaches the factored figure. The Assessor's decline-in-value page states the rule for Los Angeles County.
None of this carries over to a buyer. A sale sets a new base year value at the price, whatever the seller's assessment was and whether or not it had been reduced.
What the tax bill is made of
The Los Angeles County Auditor-Controller describes the rate on a bill as a general 1 percent levy that applies to every bill, plus the voter-approved debt issues for the property's particular area. State law limits the general levy to 1 percent of assessed value. The debt rates are computed each year and depend on what voters approved where the parcel sits, so two buildings with the same assessed value in different parts of the county can owe different amounts. The bill also carries direct assessments, listed apart from the rate. Your own bill shows the total rate for your parcel, and no single county-wide figure replaces it.
A buyer then gets supplemental bills. The Board of Equalization treats a change in ownership as a supplemental event, and the new owner receives supplemental tax bills in addition to the annual bill, figured on the difference between the new value and the old one.
Why a buyer's NOI uses the buyer's tax
Net operating income describes what the building will earn for whoever owns it, and a buyer is pricing the years after closing. In those years the tax is computed on the buyer's price. Your bill reflects when you bought and the formula since, and section 110 presumes the buyer's new base year value will be the price, so a buyer analyzing your building replaces that line before touching any other.
Property tax is an operating expense that the law itself resets at a sale. The increase is the gap between your assessed value and the price, times the rate. A buyer rebuilds every other line of NOI from what the building will cost to run after closing, but this one takes no estimating. It is the price times the rate on the bill.
A worked example with made-up numbers
Every figure here is invented to keep the arithmetic easy to follow. The building nets $180,000 a year before property tax, meaning rents less vacancy and every other operating cost. The seller bought long ago, and the factored base year value is $800,000. Only the 1 percent general levy is used, on both sides, so the voter-approved rates on a real bill are left out.
| Line | With the seller's tax | With the buyer's tax |
|---|---|---|
| NOI before property tax | $180,000 | $180,000 |
| Property tax at the 1 percent levy | $8,000 on $800,000 | $30,000 on $3,000,000 |
| Net operating income | $172,000 | $150,000 |
| Value at a made-up 5 percent cap rate | $3,440,000 | $3,000,000 |
The tax changes by $22,000 a year. Divided by 5 percent, $22,000 of NOI is $440,000 of price, which is the whole gap between the two columns. A seller pricing from the left column is asking a buyer to pay $440,000 for tax savings that end at closing.
The $3,000,000 deserves a check, because the buyer's tax depends on the price and the price depends on the NOI after tax. Both hold at once if you add the tax rate to the cap rate and divide the NOI before tax by the sum. Here that is $180,000 divided by 6 percent, which is $3,000,000. Then 1 percent of $3,000,000 is $30,000, which leaves $150,000 of NOI, and $150,000 at 5 percent is $3,000,000 again. Each voter-approved rate on a real bill adds to the divisor the same way, and a larger divisor means a lower price. When you use the calculator, enter the tax at the price you are testing, then run it again at the value it returns.
Shaya can rebuild your NOI with the tax a buyer will pay and show you the price it supports before you set one.