How To Calculate California Property Taxes

Published: 10/13/2021 8:03:09 AM

Most homeowners in America are familiar with property taxes. One aspect of the property tax that homeowners may not be as familiar with is that property tax rates and laws vary by jurisdiction.

For example, a homeowner in a Florida city would not be subject to the same property tax rates as a homeowner in a Georgia city. Taking this example further, there are also local rules and taxes that also factor into the homeowner’s final tax bill.

California has always been one of the best states to invest in real estate, and in this article we will discuss how to calculate California property taxes.

What is the Property Tax?

Before getting into the intricacies of California’s property tax laws and rates, it is helpful to discuss what exactly the property tax is. Property taxes are levied mostly at the local level in order to help municipalities and governments generate revenue. Many entities can also overlap in their ability to levy property taxes.

For example, a school district, utility district, county, and city can all have the same authority to collect property taxes. Because the specific rules for each jurisdiction vary widely, we will focus our ongoing discussion on the basics of California property taxes.

Calculating Property Taxes

The method of calculating property taxes was codified in 1978 by California’s Proposition 13. Under this law, a homeowner’s property tax liability is calculated by multiplying the assessed property value by the standard tax rate. California’s standard tax rate is one percent, so a homeowner will usually pay one percent of the property’s value in property taxes.

However, an additional amount should be set aside to account for local taxes that are almost always levied. A widely accepted method for making sure this amount is covered is to include an additional quarter percent of the home’s value. Therefore the typical California homeowner should set aside 1.25% of the home’s value to cover their yearly real property taxes.

Accounting For Home Improvements

Many homeowners choose to make home improvements to not only further enjoy their property, but to also increase their property’s value. A somewhat complicated situation may arise where the homeowner’s property was given an assessed value at the beginning of the year, but halfway through the year the homeowner completes a major renovation project. This situation is typical and requires an extra step in calculating the homeowner’s final property tax bill. The first step is to calculate the tax bill without the improvements by following the method discussed above. After the improvements are completed, the property will be given an assessed value that includes the improvements. The homeowner then multiplies the value with the improvements by 1% to calculate the tax bill owed with improvements.

An example will help clarify this process. Suppose a homeowner has property with a value of $500,000 at the beginning of the year. On July 1st, the homeowner completes a renovation project that increases the value of the home to $600,000. In this situation, the homeowner will pay property taxes of $2,500 for the half of the year without the improvements, and $3,000 for the second half of the year that includes the improvements. We reached these rates by multiplying the value of the home by the standard 1% tax rate and dividing by two, as the different values were present for only half of the year, not the entire year.

Personal Property Taxes

California also levies taxes on personal property. This includes luxury items, such as boats and recreational vehicles, and some items used for business purposes such as furniture, equipment, and computers. Personal property tax rules do not fall under Proposition 13, but are regulated at the local level. Personal property tax rules vary widely by jurisdiction, but it should be noted that failure to pay the personal property tax can result in fines or liens placed against the property.

We hope this overview of California property taxes has been beneficial. Although local tax rules are beyond the scope of this article, the general guidelines discussed above will give you a good idea of how property taxes are calculated in California as well as the helpful reminder that it is always a good idea to set aside the estimated taxes owed.

Calculating California property taxes involves a number of rules and regulations that become easier to deal with over time. It is good practice to hire an experienced tax professional to answer any questions you might have when first filing your California property taxes.

Doing so will not only ensure your taxes are accurate, but also expand your knowledge base of California property taxes. While this can be helpful in your day-to-day operations, we understand this can still be complex for real estate investors. In which case we recommend reaching out for tailored full service support.

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