January 7, 2015

The Other Prop 8

Many people are familiar with Prop 8, the gay marriage ban passed in 2008 by California voters which was ultimately ruled unconstitutional. However, unknown to many, there is another Prop 8 which was also passed by voters, albeit in November 1978. Unlike the latter Prop 8, the prior Prop 8 lacks the same amount of controversy. I can assure you of this. The prior Prop 8 was passed because California voters passed the landmark ballot initiative Prop 13 in June 1978.

In short, Prop 8 allows for the county assessor to assess the property below the Prop 13 value if the home's value is below the factored base year value, i.e. the Prop 13 value. The following example illustrates the interplay between Prop 8 and Prop 13.

Theo Chambers purchases a home in Campbell, CA in July 2008 for $600,000. The assessed value under Prop 13 can be raised at most 2% per year. Thus for 2009, the maximum assessed value for 2009 that Santa Clara County can impose under Prop 13 is $612,000. 

Theo unfortunately purchased his home just prior to the great recession. Real estate prices naturally suffer a precipitous drop. In Theo's case, his home depreciates $150,000 in value in the ensuing months. When January 1, 20009 rolls around, the market value of his home is $450,000. Due to Prop 8, Theo's assessed value will also be $450,000, rather than $612,000. So when Theo pays his property tax bill, it will be derived from the $450,000 assessment.

Years later, the real estate market recovers and home prices increase to levels greater than or equal to the prerecession levels. Consequently, Theo's home is now worth $750,000 in 2015.

Santa Clara County can now assess Theo's property under Prop 13 because of the appreciation. However, it cannot assess Theo's property at $750,000 because it has not reached that level under Prop 13's annual 2% increase. A 2% increase from 2009 to 2015 yields an assessment of roughly $690,000. Thus, Santa Clara County will use the $690,000 assessment for Theo's property taxes.    

Another salient point is that in times of significant real estate appreciation, the assessor can increase the assessment greater than 2% in consecutive years under Prop 8. For example, assume a home is purchased for $100,000 in 2013. Home values plummet because of a derailed train carrying crude oil that pollutes the entire town. This results in the home losing $50,000 of its value in 2014. Prop 8 kicks in and the assessment is $50,000. Yet in 2015, a wealthy philanthropist donates tens of millions of dollar to the city to revitalize it and home prices rebound immensely, such that the value of the home is now $125,000. The county assessor can now roughly increase the assessment $54,000 because the Prop 13 value is less than the market value. That is, the 2% increase of $100,000 from 2013 to 2015 results in roughly a $104,000 assessment. Therefore, the property taxes will be based off of the assessment of $104,000, not $125,000.