A Taxing Situation

By: Mark Wisterman

 

Here is an illustration of how the assessed valuation calculation works when you have been awarded a reduction in your assessment.

We are going to assume the following:

1. Joe Homeowner has just had the assessed valuation on his Lake Oroville home reduced from $300,000 to $225,000
2. For the sake of keeping this discussion as straightforward as possible, Mr. Homeowner will make no improvements to his Lake Oroville home.
3. Over the next 5 years  the value of his Lake Oroville home rises 10% per year

Under Prop 13 rules Mr. Homeowner’s assessed valuation, before the reduction can only increase a maximum of 2% per year. Without the reduction, under Prop 13, in the next tax year, Mr. Homeowner’s assessed valuation could be no more than $306,000 ($300,000 + the 2% increase of $6,000).

While still enjoying the benefits of the reduced assessment, the  2% Prop 13 limitation does not apply. In the tax year following the reduction a reassessment is done to reflect the 10% valuation increase. The new assessment becomes $247,500 ($225,000 + 10%).

The following year the assessment will be increased to $272,250 ($247,500 + 10%)

Year 3 will be $299,475 ($272,250 + 10%)

Which now brings us to year 4. And here is the twist:

Notice that the year 3 value is still below the $300,000 pre-reduced assessment. Does this mean that the county can increase the assessment another 10% to $329,423 ($299,475 +10%), or do they assess it at the $300,000 from 3 years ago.

The answer is: Neither.

During the time that the reduced assessment is in place there is a running calculation kept of what the assessed valuation would have been WITHOUT a reduction ever taking place. This is called the Factored Base Year Value. The current assessment cannot exceed this Factored Base Year Value. In our case, the year 4 assessed value can be no more that $324,730. Which is the equivalent to adding 2% per year to Mr. Homeowner’s $300,000 original assessment.

If you are now thoroughly confused, I do not blame you. Here are a couple of websites for you to visit that have more detailed information. But, with values on the rise, it is important for you to know how it will affect you in this regard.

 

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