Under California Proposition 13, each County in California collects an annual real property ad valorem tax not to exceed 1% based of the value at time of the purchase with annual increases restricted to an inflation factor not to exceed 2% per year.
As the rate of return of real property tends to grow faster than the 2% cap, over time the lower tax base becomes a valuable asset.
Proposition 13 disincentivizes sales in instances where the assessment value is lower than the market value. This is because selling and purchasing a comparable real property at the same price point would result in a significantly higher annual assessment.
For residential real property owners, there is a parent to child reassessment exemption credit of 1 million dollars (at the time of transfer – difference of Fair Market Value minus present annual property tax assessment.) This credit is for one residential property only. No second property or rental property qualifies.
In order to keep this Proposition 19 parent to child credit, one must live at the subject residential property for at least one year post transfer. The county may physically verify that you are actually living there.
Also under Proposition 19, those age 55 or older can transport the preexisting proposition 13 rate to a new property in another county.
For real property held and owned by a legal entity (e.g. LLC), a change of majority control or ownership results in a reassessment. This has encouraged fractionalized ownership where no one person owes more than 50%.
Assuming real property values exceed 2% growth over time, Proposition 13 has an elevated impact for long-term investors who need to be extra cautious when structuring ownership and title upon acquisition, and prior to lifetime dispositions and death. Failure to do so can result in otherwise avoidable partial or total reassessment.