THE DIFFERENCE BETWEEN MARKET AND ASSESSED VALUES In June 1978, California voters approved Prop. 13, a property tax limitation initiative which amended the State Constitution. Prop. 13 rolled back most local real property (real estate) assessments to 1975 market values. It also limited the property tax rate to 1% plus the rate necessary to fund local voter-approved bonded indebtedness; the initiative capped future property tax increases at 2% a year. Under Prop. 13, similar properties may have substantially different assessed values based solely on the dates the properties were acquired. Disparities result wherever significant appreciation in property values has occurred over time. Longtime property owners, whose assessed values are not increased more than 2% per year, tend to have a markedly lower tax liability than more recent purchasers, whose assessed values tend to be at approximately current market levels. Source: California State Board of Equalization Only four events can cause a reassessment: A change in ownership Completed new construction New construction partially completed on the lien date (January 1) A decline in value (see Market Value Decline) The process that California’s 58 county assessors use to determine the value of real property was established by Proposition 13. When real property is purchased, the assessor determines its assessed value, which is typically equal to its purchase price or “acquisition value.” Each year thereafter, the property’s assessed value increases either by 2% or the rate of inflation, whichever is lower. This process continues annually until the property is sold. In other words, a property’s assessed value resets to market value (what a willing buyer would pay for it) when it is sold. In most years, under this assessment practice, a property’s market value is greater than its assessed value. This occurs because assessed values may only increase by a maximum of 2% per year, while market values tend to increase more rapidly. Therefore, as long as a property does not experience a change in ownership, the assessed value and property taxes are predictable from one year to the next. Source: California Legislative Analyst’s Office 1 2 3 4 8 LOS ANGELES COUNTY OFFICE OF THE ASSESSOR UNDERSTANDING PROP. 13