4.4 Proposition 13, Mello-Roos & Property Taxation

Proposition 13: Base Year Value & Assessment Caps

Enacted by California voters in 1978 as Article XIII A of the California Constitution, Proposition 13 fundamentally restructured real property taxation in California. Proposition 13 established three core property tax rules tested extensively on the California Broker Examination:

1. The 1% Base Tax Rate Cap

The maximum general ad valorem property tax rate is capped at 1% of the property's full cash value (assessed value), plus any additional voter-approved local indebtedness (such as local school district or municipal bonds, which typically add 0.1% to 0.3% to the effective tax rate).

2. Base Year Value Establishment

A property's Base Year Value is established at its 1975–76 assessment value, OR reassessed to current fair market value upon:

• A Change of Ownership (e.g., sale, transfer, or conveyance); or
• Completion of New Construction (e.g., building a new home or adding a room).

3. Maximum 2% Annual Inflation Cap

In years where no change of ownership or new construction occurs, the assessed value of real property cannot increase by more than 2% per year, compounded annually, based on the California Consumer Price Index (CCPI).

                     ┌────────────────────────────────────────────────────────┐
                     │               PROPOSITION 13 TAX CAPS                  │
                     └───────────────────────────┬────────────────────────────┘
                                                 │
       ┌─────────────────────────────────────────┼─────────────────────────────────────────┐
       │                                         │                                         │
┌──────▼─────────────────┐             ┌─────────▼─────────────────┐             ┌─────────▼─────────────────┐
│   1% MAXIMUM BASE TAX  │             │   BASE YEAR VALUE RESET   │             │   2% MAXIMUM ANNUAL CAP   │
│ (Assessed Value +      │             │  (Resets to Market Value  │             │  (Annual inflation adjustment│
│ Voter Bonds)           │             │  upon Sale/New Construct) │             │   capped at 2% max)       │
└────────────────────────┘             └───────────────────────────┘             └───────────────────────────┘

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Reassessment & Supplemental Tax Bills

When real property undergoes a change of ownership or new construction, the county assessor reassesses the property from its prior Proposition 13 enrolled value to its current full cash value (fair market value) as of the date of transfer.

Supplemental Property Tax Bill

Because county tax rolls are finalized annually on July 1, a change of ownership occurring mid-year creates a tax gap between the seller's old assessed value and the buyer's new reassessed value. The county tax collector issues a Supplemental Property Tax Bill directly to the new owner to collect taxes on the difference in value, prorated for the remainder of the fiscal tax year.

Exam Trap: Supplemental tax bills are NOT paid out of standard impound/escrow accounts maintained by mortgage lenders. Buyers must be advised by their brokers to pay supplemental tax bills directly to the county tax collector to prevent tax liens.

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Proposition 19: Property Tax Transfers & Intergenerational Rules

Approved by voters in November 2020 (effective February 2021), Proposition 19 significantly amended Proposition 13 rules regarding tax base transfers and parent-to-child exclusions:

1. Senior, Severely Disabled & Disaster Victim Tax Portability

• Eligible Individuals: Homeowners aged 55 or older, severely disabled individuals, or victims of wildfires or declared natural disasters.
• Tax Base Transfer: Allows eligible homeowners to transfer the base year property tax value of their primary residence to ANY replacement primary residence located anywhere within California.
• Frequency: Eligible homeowners may utilize this tax base transfer up to three (3) times in their lifetime (victims of wildfires/disasters have no limit).
• Replacement Value Adjustment:
  • If the replacement home is of equal or lesser value, the original base year value transfers completely.
  • If the replacement home is of greater value, the difference between the sale price of the original home and the purchase price of the replacement home is added to the transferred base year value.

2. Parent-to-Child & Grandparent-to-Grandchild Transfer Restrictions

Proposition 19 narrowed the intergenerational property tax exclusion:

• Transfers of residential property between parents and children (or grandparents to grandchildren if parents are deceased) qualify for reassessment exclusion ONLY IF:
  1. The property was the principal residence of the transferor; and
  2. The child/grandchild makes the property their principal residence within one (1) year of transfer; and
  3. The tax base exclusion is capped at the original assessed value plus $1,000,000 (adjusted for inflation). Any market value exceeding this limit is added to the assessed value.
• Elimination of Non-Principal Residence Exclusion: Transfers of vacation homes, second homes, and commercial rental properties no longer qualify for parent-to-child tax exclusions and are fully reassessed to market value upon transfer.

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California Property Tax Calendar & Default Procedures

California operates on a fiscal tax year running from July 1 through June 30.

Statutory Lien Date

Real property taxes become a senior lien on real property on January 1 preceding the fiscal tax year.

The Two Installments Memory Acronyms

California property taxes are payable in two equal installments:

┌──────────────────────────────────────────────────────────────────────────────────┐
│                          CALIFORNIA PROPERTY TAX CALENDAR                        │
├───────────────────┬───────────────────┬───────────────────┬──────────────────────┤
│ INSTALLMENT       │ DUE DATE          │ DELINQUENT DATE   │ MEMORY ACRONYM       │
├───────────────────┼───────────────────┼───────────────────┼──────────────────────┤
│ First Installment │ November 1        │ December 10       │ "No Late Payment"    │
│ (July 1 - Dec 31) │                   │ (at 5:00 PM)      │ (Nov 1 / Dec 10)     │
├───────────────────┼───────────────────┼───────────────────┼──────────────────────┤
│ Second Installment│ February 1        │ April 10          │ "No Fooling Around"  │
│ (Jan 1 - June 30) │                   │ (at 5:00 PM)      │ (Feb 1 / Apr 10)     │
└───────────────────┴───────────────────┴───────────────────┴──────────────────────┘

• First Installment: Covers July 1 through December 31. Due November 1; delinquent December 10 at 5:00 PM. A 10% penalty attaches upon delinquency.
• Second Installment: Covers January 1 through June 30. Due February 1; delinquent April 10 at 5:00 PM. A 10% penalty plus administrative costs attaches upon delinquency.

Tax Default & Five-Year Redemption Period

If property taxes remain unpaid by June 30, the county tax collector declares the property tax-defaulted.

1. Five-Year Redemption Period: The property owner retains legal title, possession, and the right to redeem the property by paying all delinquent taxes, penalties, and interest (at 1.5% per month) for five (5) years following tax default.
2. Tax Sale: If delinquent taxes are unredeemed at the end of 5 years, power to sell the property vests in the county tax collector, who sells the property at a public tax auction to the highest bidder.

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Special Assessment Districts: Mello-Roos Community Facilities Act

Enacted in 1982, the Mello-Roos Community Facilities Act (Gov. Code § 53311 et seq.) authorizes local cities, counties, and school districts to establish Special Tax Districts (Community Facilities Districts or CFDs) to finance public infrastructure (streets, sewers, police/fire stations, schools, and parks).

Key Mello-Roos Features:

• Mello-Roos special taxes are levied as special assessment liens on real property and are NOT capped by Proposition 13's 1% limit.
• Bonds issued by Mello-Roos districts are municipal liens that take priority over private mortgage liens.

Mandatory Seller/Broker Disclosure (Civil Code § 1102.6b)

A seller of a 1-to-4 unit residential property subject to a Mello-Roos special tax MUST make a good-faith effort to obtain a Notice of Special Tax from the district and deliver it to the buyer.

If the Notice of Special Tax is delivered after execution of the purchase contract, the buyer has the statutory right to cancel the contract within three (3) days of personal delivery or five (5) days of mailing.

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Documentary Transfer Tax (Revenue & Taxation Code § 11911)

The Documentary Transfer Tax is an excise tax levied by counties and charter cities on deeds or instruments conveying real property interests.

Statutory Tax Rates

• Statutory County Rate: $1.10 per $1,000 of transferred value (consideration), OR $0.55 per $500 (or fraction thereof).
• Charter City Add-ons: Many charter cities (e.g., Los Angeles, San Francisco, Oakland) impose additional municipal transfer taxes on top of the county rate.

CRITICAL CALCULATION RULE

The Documentary Transfer Tax is calculated ONLY on the net consideration / new equity transferred. THE TAX DOES NOT APPLY TO THE AMOUNT OF ANY PRE-EXISTING LOANS ASSUMED BY THE BUYER.

$\text{Taxable Consideration} = \text{Total Purchase Price} - \text{Assumed Existing Loan Amount}$ $\text{Documentary Transfer Tax} = \left( \frac{\text{Taxable Consideration}}{\$1,000} \right) \times \$1.10$

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Comprehensive Broker Math Worked Examples

Example 1: Standard Documentary Transfer Tax Calculation

A buyer purchases a commercial building in Sacramento County for $1,200,000. The buyer obtains a new commercial bank loan for $900,000 and pays $300,000 cash down. No existing loans are assumed.

Question: What is the total County Documentary Transfer Tax payable on this conveyance?

Calculation:

1. Identify Taxable Consideration: Since no loan was assumed, the full purchase price of $1,200,000 is taxable.
2. Apply the statutory $1.10 per $1,000 rate: $\text{Tax} = \left( \frac{\$1,200,000}{\$1,000} \right) \times \$1.10 = 1,200 \times \$1.10 = \$1,320.00$

Example 2: Transfer Tax Calculation with Assumed Mortgage

A investor purchases an apartment building in Fresno County for $800,000. The buyer pays $250,000 cash down and assumes an existing first trust deed mortgage of $550,000.

Question: What is the County Documentary Transfer Tax due on the transaction?

Calculation:

1. Deduct Assumed Loan: $\text{Taxable Consideration} = \$800,000 \text{ (Purchase Price)} - \$550,000 \text{ (Assumed Loan)} = \$250,000$
2. Apply the statutory $1.10 per $1,000 rate: $\text{Tax} = \left( \frac{\$250,000}{\$1,000} \right) \times \$1.10 = 250 \times \$1.10 = \$275.00$