Possible Real Estate Tax Change

February 22, 2019 | Steve Hable

Photo of San Diego night skyline.

As we all know, real estate owners pay a tax on the property they own. The tax is based on the market value of the property, which is generally set based on the latest sale price of the property. Historically, the County Assessor could increase the valuation as general market values increased. With rapid increases in property values in the 1970s, California voters approved Proposition 13 which limits the reassessment to the most recent sale price with a maximum increase in the assessed value of 2% each year. Therefore, property taxes are really only based on the current market value when the property is sold regardless of how long ago the sale occurred.

As the cost of living increased over time, cities and school districts complained that the current real estate tax system creates a financial hardship and requested a change in the law without much political support. As recent as 2014, then Governor Jerry Brown called Proposition 13 “a sacred doctrine that should never be questioned.” This “sacred doctrine” is about to be challenged. Toward the end of 2018, the California League of Women Voters successfully qualified a proposition for the 2020 election to alter Proposition 13 and the real estate tax code. Learn more about this proposal and Proposition 13 in this article from the LA Times.

The primary aspect of the proposition permits real estate to be reassessed to market value every three years. The proposition would not change the tax code for residential properties, including single family homes and condominiums. There is no indication if apartment buildings would be subject to the change in the law. The proposition would change the tax code for office buildings, retail centers and industrial buildings. This would result in substantial increases in real estate taxes for most of the commercial and industrial property owners. Small businesses with less than 50 employees that own the property the company occupies would also be exempted from the change.

This proposed real estate tax law change could affect all of us. Property owners charge rents to cover all of the operating expenses, including real estate taxes. Even leases for several years on commercial and industrial properties have provisions that allow the property owner to collect more rent during the lease term to cover real estate tax increases. The new increases either have to be absorbed by the tenant or passed on to their customers, which could affect all of us. If retailers pass the tax increase on to us, look for increased costs at the pizza parlor, hair stylist, supermarket, pharmacy and movie theater. Increased office costs could be passed on by doctors, dentists, and attorneys, just to name a few.

We will have almost two years to analyze and discuss this proposition. The important thing is to conduct your own review and be an informed voter.

Regardless of if this proposition becomes law or not, one thing stands out—the cost of living in San Diego requires careful monitoring and controlling of your expenses. You need a financial institution that has your best interest in mind and can help you achieve financial independence. You need Mission Fed. Contact us at any of our more than 30 local branches, online or by phone at 800.500.6328.

The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article by Mission Federal Credit Union is for the information and convenience of its readers and does not constitute endorsement, control or warranty by Mission Federal Credit Union.

Steve Hable

Steve Hable

Steve Hable is Mission Fed’s 1st VP Member Business Lending and has been in the real estate finance industry for over 30 years. His experience includes all facets of residential and commercial real estate finance, including loan origination, loan underwriting, servicing, secondary marketing (plus establishing private mortgage-backed securities on Wall Street), and property management of commercial properties.

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