Key Takeaways
- Proposition 13 (1978) limits the general property tax rate to 1% of assessed value plus voter-approved bonds
- Annual assessment increases are limited to a maximum of 2% per year under Proposition 13
- Property is reassessed to current market value only upon change in ownership or new construction
- Base year value is the market value when property was acquired (or 1975 value for pre-1975 purchases)
- Additional taxes (Mello-Roos, bonds) can bring the total tax rate above 1%
Proposition 13 Tax Limitations
On June 6, 1978, California voters approved Proposition 13, a property tax limitation initiative that fundamentally changed how California taxes real property. Understanding Proposition 13 is essential for the California real estate exam.
Three Pillars of Proposition 13
1. Tax Rate Limitation
Proposition 13 limits the general property tax rate to 1% of assessed value.
| Component | Rate |
|---|---|
| Base tax rate | 1% of assessed value |
| Voter-approved bonds | Additional (varies by area) |
| Total effective rate | Usually 1.1% - 1.5% |
Note: The 1% limit applies to the base tax only. Voter-approved bonds for schools, infrastructure, and local improvements add to the total tax bill.
2. Assessment Increase Limitation
Annual increases in assessed value are limited to a maximum of 2% per year.
| Year | Maximum Increase |
|---|---|
| Year 1 (base year) | Market value at acquisition |
| Year 2 | Up to 2% increase |
| Year 3 | Up to 2% increase |
| Each year after | Up to 2% increase |
This means a property purchased for $500,000 cannot be reassessed higher than $510,000 the following year, regardless of market appreciation.
3. Reassessment Triggers
Property is reassessed to current market value only upon:
| Event | Reassessment |
|---|---|
| Change in ownership | Full reassessment to market value |
| New construction | Addition of improvement value |
| Neither occurs | 2% maximum annual increase |
Base Year Value
The base year value is the foundation for all future assessments:
| Acquisition Date | Base Year Value |
|---|---|
| Before March 1, 1975 | 1975 assessed value |
| On or after March 1, 1975 | Market value at acquisition |
Example: Proposition 13 in Action
A family purchased a home in 1990 for $200,000:
| Year | Maximum Assessed Value |
|---|---|
| 1990 (purchase) | $200,000 |
| 2000 (10 years) | ~$244,000 (2% annual increases) |
| 2010 (20 years) | ~$297,000 |
| 2025 (35 years) | ~$400,000 |
Even if the home's market value is now $1,500,000, the assessed value for tax purposes remains around $400,000.
Who Benefits from Proposition 13
- Long-term homeowners - Pay taxes based on old purchase price
- Inherited properties (with Prop 19 limitations)
- Businesses that haven't changed ownership
- Landlords with older properties
Criticism and Ongoing Debate
Critics argue Proposition 13:
- Creates inequity between new and long-term owners
- Reduces local government revenue
- Benefits commercial property more than residential
- Has been modified by Proposition 19 (2020)
Under Proposition 13, property is reassessed to current market value upon:
What is the maximum annual increase in assessed value under Proposition 13?