As a commercial real estate broker with over 18 years of experience in the industry, I’ve seen firsthand the profound impacts Proposition 13 has had on California’s housing and property markets. This monumental piece of legislation was passed back in 1978 as part of the nationwide taxpayer revolt, led by Howard Jarvis. It essentially capped annual property tax increases at a 2% maximum, based on the assessed value when purchased, which often remained at the selling price for decades.
- Proposition 13 drastically reduced and capped property taxes in California in 1978.
- While protecting homeowners, huge tax subsidies were created for large commercial property owners.
- A split roll reform is gaining momentum – taxing commercial and residential property separately.
The Mixed Legacy of Proposition 13 in California Real Estate
While Prop 13 achieved its aims to allow longtime homeowners – especially elderly and lower-income residents – to afford to stay in their homes amid rapidly rising prices, over 40+ years later, a complex web of unintended consequences has also emerged from locking in property tax levels for generations. Let’s analyze key effects on both residential and commercial real estate sectors:
Residential Housing Market Distortions Under Proposition 13
Property taxes in California tell a tale of two groups – the established long-time homeowners who hit the lottery with Proposition 13 versus the new buyers getting squeezed hard.
My clients share astonishing stories of neighbors living in virtually identical houses but paying wildly different tax rates – we’re talking 10 times more!
This bad deal gets worse if you want to downsize or relocate since the law penalizes you for moving with brutal tax resets. Estimates show over 50% of empty-nesters feel trapped – they just renovate existing big homes rather than the right size.
And for new young families trying to plant roots given the state’s chronically low housing supply, not only do they fork over crazy high purchase prices but also carry a greater property tax load. It’s unjust double jeopardy.
This drives more sprawl as priced-out buyers keep getting pushed farther out into surrounding counties with better schools and affordable ownership options still accessible.
A generational divide has formed – older Californians won the lottery benefiting immensely from Proposition 13 windfalls decades back while new entrants now cover all the revenue gaps plus face economic barriers to the dream of homeownership. The scales seem tipped unfairly!
Commercial Owners Reap Outsized Rewards
On the commercial side, Proposition 13’s consequences have been even more financially severe. Smart corporations exploit legal loopholes, avoiding property re-assessment when they transfer controlling shares internally or within limited liability partnerships. As a broker, I’ve facilitated many such deals shielding companies from brutal tax resets.
Meanwhile, older business owners sit pretty on prime properties like warehouses or storefronts with assessments frozen at 1978 levels. For example, one of my clients owns an industrial building taxed at under $2 per square foot while comparable new inventory sells for over $100.
This crazy differential leads to high turnover and consolidation as small business owners struggle to budget properly or secure financing against such extreme disparities. The increased tax burden imposed on residential homeowners and newer companies essentially provided an untenable commercial subsidy that favors older legacy businesses
Reform Efforts Underway
In recent years, a split roll initiative has gained significant momentum, with polls indicating majority support for taxing commercial and residential properties differently under Prop 13. This would:
- Annually reassess commercial and industrial buildings to current market value while retaining caps for homeowners.
- Potentially generate over $10 billion in revenues for economically struggling cities and counties.
- Begin to rectify systemic inequities while still keeping protections for vulnerable long-term residents.
I wholeheartedly support measured efforts to enact a fair split roll gradually over time. Having navigated skewed real estate dynamics stemming from 1978, reform remains overdue to balance affordability, opportunity, and shared prosperity as our communities evolve. What proved beneficial decades ago must now stand aside for the challenges of future generations.
Evaluating the Current Market Value and Proposition 13’s Influence on Property Taxes
Proposition 13 has had a big impact on property taxes in California since 1978. Under this law, property taxes are based on the assessed value when the property was purchased. They can only increase by 2% maximum each year, no matter how much the market value goes up.
This has created some unfair situations for homeowners and buyers. Let’s take an example of two neighbors – Jasmine and Maggie. Both of their houses are worth $800,000 in today’s market. But Jasmine bought her home back in 1985 for $120,000. So her assessed value might only be around $250,000. That means she pays much lower property taxes than Maggie, who recently bought her house.
So even though the houses have the same market value, Maggie pays over 3 times more tax because her home gets reassessed at full purchase price. This makes it very difficult for new buyers to enter the housing market when their taxes are so high.
Analyzing the Current Market Value and Its Relation to Proposition 13
This example shows that under Proposition 13, the current market value of a home doesn’t always align with how much tax the owner pays. Your property’s assessed value can be much lower than what your house would sell for today.
Home buyers need to be aware of this reality.
Before purchasing a property, you should review the assessed value and see how it compares to the asking price. This will give you a realistic estimate of potential tax amounts. Don’t assume your taxes will be 1% of market value – for some owners, the tax is based on decades-old assessed valuations.
Understanding this dynamic is important for buyers to make informed decisions and budget properly. Sellers also need to grasp the nuances in practice, rather than theory, to accurately convey after-sale expenses.
Impact of Proposition 13 on Annual Property Tax and Property Assessments
In addition to a 2% cap on annual increases, Proposition 13 has also limited reassessments. Normally when a property gets sold, the county completely re-appraises it based on the sale price. But under Prop 13, inherited properties can avoid this.
When children or grandchildren inherit a home, the assessed value gets passed down without changing. So even if the actual property value increased substantially, taxes stay frozen at the locked-in, outdated assessed amount for that family.
This can mean new generations sometimes pay 90-95% less property tax than their neighbors. While it helps continue housing stability across generations, it also reduces overall revenues available for schools and infrastructure.
Understanding Raise in Property Tax and Proposition 13’s Influence
Hopefully, this breakdown helps provide context around Proposition 13’s ongoing impact on property taxes. Even over 40 years later, this law still has meaningful implications for what new home buyers pay versus established owners.
As real estate professionals, we want to make sure our clients have full transparency into how the market value, sale price, and assessed value interact to determine your tax bill. Don’t hesitate to ask me any other questions about the process!
How has Prop 13 favored commercial property owners?
By locking in extremely low property taxes for corporations that have held land long-term while residential/new owners shoulder cost burdens.
What is split roll reform?
Amending Prop 13 to reassess commercial properties at market value regularly so tax burdens get redistributed more evenly.
Does a split role harm small business owners?
Not if changes come slowly with caps and exemptions for owners under a size threshold.
Can property tax reductions increase gentrification?
Absolutely – when longer-term owners are insulated from taxes, it raises prices and pressurizes surrounding lower-income neighborhoods.
What are arguments made opposing a split roll?
Some claim it represents an unnecessary tax hike that will get passed to consumers or slow California’s economic growth.
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