Refinancing Does Not Cause Your Property Taxes To Go Up

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do your property taxes go up in California when you refinance your property?

This is one of those urban legends. People are concerned that because the house is appraised by the lender, the assessor is somehow going to find out that their property is worth more and send their tax bill soaring.

However, thanks to Proposition 13 in California, the formula for property taxes has little to do with current market value or what the home is really worth. The formula is based upon the purchase price plus two percent per year, compounded. If you can document that your home is worth less than this amount, contact your county assessor's office. But if it's worth more, they cannot increase it beyond this number.

Indeed, certain family transfers can preserve this lower tax basis. Mom and dad deed it (or will it) to the kids, and the kids keep paying taxes on it based upon a purchase price of perhaps $60,000 (Plus thirty-odd years of compounding at two percent, so maybe $115,000) when comparable homes may be selling for $600,000.

There are two major exceptions. First, a sale. If you sell it to someone else, then repurchase, you don't get the old tax basis back. Second, improvements. If you take out a building permit, the assessor will add the current value of your improvements to your tax bill. This can, in situations like the previous paragraph, result in a tax bill that literally doubles if you add a room. Indeed, this is one of the main reasons for the growth of the unlicensed contractor industry, because licensed ones have to make certain the permits are in order, and homeowners are trying to sneak one over on the county. This is why a very large proportion of properties in MLS have the notation that "this addition may not have been permitted." They know good and well that the addition wasn't permitted, and quite likely isn't to code, either. If it's built to code it's usually grandfathered in to subsequent updates. Subsequent owners can get forgiveness as innocent beneficiaries who bought the house like that, and so the purchase price included the value of that room (and occasionally, the state finds it worth its while to go after the previous owner for back taxes and possible penalties, and I believe that the incidence of this will likely increase dramatically in the next couple of years). If it's not built to code, however (an offense unlicensed contractors often commit), the subsequent owner can be looking at a large mandatory repair bill, or perhaps even demolishing the addition they paid for if the county inspector deems it unsound. You want to be very careful about properties with the "addition may not have been permitted" disclosure.

Other states, by and large, still follow the assessment model California used to follow, pre-Proposition 13. They have county records of the property characteristics, and evaluate the home based upon those characteristics, whence comes your assessment, and hence, your property tax bill. This still encourages unlicensed contractors and working without required permits, with effects much the same as the previous paragraph, which is definitely not good, but in this case subsequent owners have nothing but incentive to keep improvements off the county books, where in California, subsequent owners have motivation to want improvements updated into county records. I am not aware of any state which follows a model whereby refinancing will alter your tax bill.

Caveat Emptor

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do your property taxes go up in California when you refinance your property This is one of those urban legends. People are concerned that because the house is appraised by the lender, the assessor is somehow going to find... Read More

4 Comments

It sounds to me, from the last couple of sentences, that you are saying the way California does it is the preferred way?

I have never seen the "additions may not have been permitted" notation in househunting in either Washington or Texas.

Dan Melson said:

I like the way California does it better, Ruth, but that's only possible due to the impact of Proposition 13. Other states don't have Proposition 13, and as much as I believe it does far more benefit than harm, I would advise any other states considering it that it appears to be a very worthwhile undertaking - the more so the longer it is in effect.

State laws are different everywhere. I've only dealt with purchases in California, but there is an affirmative requirement to disclose here, and the sooner you do it, the better your position in court, if it comes to that. Heck, I'll put the "may not be permitted" disclosure into MLS if I even think it might not have been permitted. If the buyer has been given all of the available evidence, and they have made their own decision, the seller and their agent are basically golden

Lola said:

So we were considering being investement property in Texas. They do not have prop 13, and property taxes start pretty high 3%, and go up significantly every year, something like 10% a year. I heard that in 15 years you wind up paying more property tax then your mortagge. However, they don't have any State tax. So for someone living and working in Texas, it winds up being better. What do you thing; higher property taxes/no state tax vs. what we have in California?

Dan Melson Author Profile Page said:

I think that in general Texas is a better investment than California. The Texas political structure understands what creates economic prosperity while the California political structure demonstrably does not. As a result, last I heard, Texas was the leading job creation market in the US, while the US (exclusive of Texas) was actually losing jobs.

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About this Entry

This page contains a single entry by Dan Melson published on December 11, 2014 7:00 AM.

Advertising a Sold Property As Available on MLS was the previous entry in this blog.

How To Effectively Shop for A Real Estate Mortgage Loan is the next entry in this blog.

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