It's no secret that rental property owners have bills to pay for their real estate investment. For all the revenue that you make throughout the year, there are also those pesky expenses that play an equal part in your net operating income. Property tax is just among the numbers that a landlord needs to account for, and understanding how it works and what it may cost is essential to property management.
Understanding Property Taxes in California
Calculating California Property Tax
The standard property tax rate for California properties is around 0.71% of the value based on property tax assessments, as per SmartAsset's California property tax calculator tool. It's lower than the national rate which is normally at 0.99%, which serves as an advantage for property owners.
The property's assessed value is determined by the county assessor's office and can only increase by a maximum of 1% per year unless there's new construction or a change in property ownership, according to California real estate law.
- Proposition 13 states that a change in ownership whether it's full or partial, will result in re-assessing the property's current value. The same goes for new construction, wherein the assessed property value is redetermined after completion of the construction.
In that case, the annual property tax may increase by no greater than 2%, regardless of any changes in the real estate market. That excludes the potential transfer tax charged in the sale of the property.
Paying Your California Property Tax Bill
The property tax bills in California are usually mailed in October. The first installment is due on November 1st while the second falls on February 1st. Failure to pay your California property tax bill can result in penalties and interest charges.
Landlords typically have five years to become current on delinquent property taxes. However, continuous late payments or failure to pay property taxes will ultimately lead to losing your property in a tax sale, so be sure to practice timely and accurate payment.
Changing the Assessed Value of Your Property
There are ways to have your property tax rate changed, and it depends on the kind of California property you have as well as the purpose of the unit.
Minimizing Property Tax Rates Through Exemptions and Deductions
Landlords can deduct various costs from their annual property tax such as maintenance and operations, provided that they qualify as real estate professionals. A landlord can be called as such if they spend more than half their working hours in the rental business, as per the Internal Revenue Service.
Material participation as a real estate professional will grant you non-passive tax treatment, wherein you can offset other types of income without being subjected to the next investment tax. You are qualified if you:
- Do the work for more than 500 hours within the year
- Do most, if not all of the work
- Work at least as much as everyone involved
- Materially participated in the business for at least 5 years in the last 10 years, consecutive or not
- Worked regularly or on a substantial basis
Active participation or management duties may also make you eligible for deductions, which involve a lower standard of involvement such as:
- Approving new tenants
- Creating rental terms
- Approving expenditures
This will grant the property owner the potential to deduct passive losses from their property tax bill, given that they have at least 10% interest in the investment. The deduction can go up to $25,000 if your modified adjusted gross income is $100,000 or less.
Low-value property tax exemption is also an option, which allows a California property with a base year value and personal property value of around $10,000 or less to be almost or totally exempt from having to pay property tax.
The county board of supervisors may determine a new maximum value annually for real and personal properties. The board still isn’t authorized to real property with a base year value, or personal property with a full value, of more than $10,000.
Homeowner's exemption also offers a low property tax rate, which is when the landlord also lives on the premises. A deduction of $7,000 can be implemented based on the Revenue and Taxation Code section 218. It reduces the property's assessed value on a qualified residence.
Disabled veterans exemption, on the other hand, lets eligible veterans claim a $100,000 exemption. It bears the highest advantage among the exemptions and property tax deductions, but the applicant must meet the definition of a disabled veteran such as:
- Being blind in both eyes or having a visual acuity of 5/200 or less
- Lost the use of two or more limbs
- Completely disabled as a result of injury or disease incurred in military service
Challenging Your Property's Assessed Value to Reduce Taxes
You can challenge the assessed value of your property by filing an Assessment Appeal Application with the county clerk in California, although there are only specific filing periods you can do so. You will then be scheduled for a hearing where you present evidence like sales data.
You might need to hire a tax professional or a property manager who is familiar with the tax in California and how it works. Companies like Blue Line Property Management would even create a statement for your annual property tax bills so you can keep track.
California Property Taxes for Residential vs. Commercial Rentals
There may be variations in California property tax rates depending on the kind of rental you own. Residential rentals may have a smaller property tax bill based on the assessed value and other property details. Commercial units may have a higher property tax rate due to:
- Having a higher assessed value
- Providing higher economic impact
- Intensive land use
Some jurisdictions offer deductions or incentives for California property taxes for certain properties such as those that create jobs or contribute to economic development, regardless of the purchase price or assessed value.
California Property Tax FAQs
How to appeal my property's assessed value?
You need to file the appeal with the county assessor's office within a specified time to reassess the current market value of your property.
When do I pay my property tax bill?
For California, it falls on November 1st and February 1st. Failure to pay property taxes beyond December 10th and April 10th will result in penalties and other charges.
What are property taxes for?
Property tax payment contributes to local government operations, as well as funds for taxpayer services, public schooling, police departments, fire houses, and public safety.
Do property taxes vary by county?
Yes. The California property tax rate is around 0.71%, which is lower than the average property tax rate in other counties.
Hiring a Property Management Company for Accounting
Mishandling your property tax bill can become expensive very quickly. Blue Line Property Management offers services to help manage your annual property tax bill and other potential property tax obligations by having the necessary tax rate expertise. Property tax preparation comes as a part of our full-service property management for your rental property
You can schedule a consultation to learn more about our services or use our free ROI Calculator to get free access to some of the powerful tools we have.
