Understanding Property Taxes

Property taxes are defined as "taxes imposed by municipalities upon owners of real property within their jurisdiction based on the value of such property."

There are three types of property: land, improvements to land (immovable man-made objects, such as buildings), and personal property (movable man-made objects). Real property (also called real estate or realty) means the combination of land and improvements. Under a property tax system, the state requires and/or performs an appraisal of the monetary value of each property, and tax is assessed in proportion to that value. Forms of property tax used vary between counties and jurisdictions.

A special assessment tax is sometimes confused with property tax. These are two distinct forms of taxation: one (ad valorem tax) relies upon the fair market value of the property being taxed for justification, and the other (special assessment) relies upon a special enhancement called a "benefit" for its justification.

The property tax rate is often given as a percentage. It may also be expressed as a per mille (amount of tax per thousand currency units of property value), which is also known as a millage rate or mill levy. (A mill is also one-thousandth of a currency unit.) To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of US $50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of US $1,000 per year. In more familiar terms, dividing the mills by 10 (moving the decimal point to the left by one) yields the percentage rate – 20 mills = 2.0%.

In the California, property tax on real estate is levied by local government, at the municipal or county level. The assessment is made up of two components—the improvement or building value, and the land or site value. The property tax is the main tax supporting local education, police/fire protection, local governments, some free medical services, and most of other local infrastructure.

Direct Assessments

Unlike ad valorem property taxes, bonds and direct assessments are flat fees imposed on each parcel of real estate in an area after a city- or district-wide vote, in order to fund various services for that area not covered (or insufficiently funded) by property tax revenue. Some of the public projects commonly funded by bonds and direct assessments are street landscaping and lighting, public transportation, library services, vector control (i.e., pest control), parks and recreation, violence prevention and increased police presence and local schools.

Special Assessments

In recent times, many cities have required subdivision developers to build and ensure long-term funding for the parks, schools and emergency services that will directly benefit their subdivision to prevent the influx of new homes from causing a drain on existing municipal services. These dedicated services, which may be located within the subdivision but are often made available to all area residents, are funded in the long-term by special assessments.

When considering a particular home, research the ad valorem tax rate and any bonds or assessments that may apply to that property by visiting the county assessor's Web site and searching for tax records for that particular property address. The current tax year's data is also usually disclosed from seller to buyer during escrow. This will allow you to plan your monthly budget and ensure you can handle the true, total costs of ownership -- beyond just the mortgage payment.

Payment

Annual property tax bills are mailed every year in October to the owner of record as of January 1 of that year. If you do not receive the original bill by November 1, contact the County Tax Collector or Assessor for a duplicate bill. Note the original bill may still have the prior owner’s name on it the first year.

Your Buyers should expect to receive either one or two separate supplemental bills, which are in addition to your annual bill. These supplemental bills are for the difference in value between your new value and the seller’s prior value. Supplemental bills are generally issued between three months to one year after you acquired the property. After you receive these supplemental bills, you can expect to receive only one bill a year thereafter. However, new supplemental bills will be created if there is another change in ownership or new construction event occurring on the property. Generally, supplemental taxes are not covered by impound accounts, and you are directly responsible for making payments.

Annual taxes are payable in two installments, the first is due November 1. It becomes delinquent if not paid by December 10. The second installment is due February 1, and becomes delinquent if not paid by April 10. Supplemental bills will have unique due dates as shown on the bill.

Locating tax amounts and payment status can be accessed throughout the year on the Tax Collector’s website for your county. You will need your Assessor's Identification Number (AIN) also known as a Parcel Number to use this feature.

If you purchased a home or condominium in a new development, it is possible your property tax parcel number may not be created as of your purchase date or by the time the first annual taxes are due. If your property address is not yet on our records, you will need your legal description and Assessors Identification Number in order to properly index your situation with the County Assessor and County Tax Collector. You can locate this on your deed or title report. County Assessor staff should then be able to tell you when your first annual bill will be assessed and what to expect.

Prorations

A real estate purchase transaction culminates on closing day, when the settlement statement shows the property tax proration. Property taxes for the previous year are divided fairly between the seller and the buyer, with the closing date as the cutoff for the proration. Typically, the closing papers credit the buyer with the seller’s prorated portion of the property taxes. The sales contract can specify a specific proration date, but usually the seller’s tax obligation runs until the day before the closing date, while the buyer’s taxes begin on the closing date.

The Fiscal Year (a period for calculating annual financial matters) for the State of California, does not correspond to the Calendar Year and begins July 1st of the current year and ends June 30th of the following year. The First Half ends December 30th of the current year and the Second Half begins January 1st of the following year.

If the seller has already paid the annual property taxes, the buyer typically reimburses the seller for the period in which the buyer will be occupying the property. Likewise, if the taxes have not been paid, the seller typically reimburses as the buyer for the period in which the buyer occupied the property.

The settlement statement you get at closing generally controls how the real estate taxes are apportioned between the seller and buyer. The statement should clearly state how the real estate taxes for the year are prorated between the two parties. As stated above, the seller should be charged with the amount of tax from the beginning of the real property tax year to the date of closing. The buyer should be charged with the balance of the tax to the end of the real property tax year. Thus, each party is responsible for their share of the real estate tax during the real property tax year.

Since property taxes are paid in arrears, or for the current year toward the end of the year, you'll probably use the last year's tax bill. Determine how many days the seller has owned the property. This should be an exact number of days. For example, January and February of 2010 have 59 days. Divide the total annual property tax bill by 365. This calculation will give you a daily tax rate. Round the daily tax figure down to the third or fourth decimal to start with. For example, an annual tax bill of $1160, divided by 365, will give you a daily rate of 3.178082192, which you can round to 3.1780. Multiply the daily tax rate by the number of days the seller has owned the property. In this example, the seller has owned the property for 59 days, multiplied by 3.1780, which gives you $187.502. You can round the final figure down to two decimal points, or $187.50.

One simple way to reference taxes are to remember that whomever is charged (or whomever previously paid) for the bill for that Installment is the one who will receive the credit when the taxes are prorated, since they did not own the property during that time.

Each County has a website where payments can be made and status of payment can be viewed. Simply search for the County Assessor for the subject property in Escrow, and you can look up the Tax Bill by Parcel number (a unique identification number assigned to each piece of real property), or by property address.

If the real estate taxes for the real property tax year have not been paid on the date that the sale of the home is closed and if the contract doesn't specify for prorating at closing, the buyer will have to pay the real estate taxes in full. It doesn't matter that the seller owned the property for part of the real property tax year. It gets worse; the seller can deduct the share of real estate taxes that the buyer paid. The IRS guidelines are strict. The buyer can deduct only their share of the property tax, not the entire amount they paid. One thing to note in the scenarios above is that the buyer can add those taxes to their cost basis in the home if the seller doesn't reimburse them for their share of the tax burden.