Proposition 13 or better known as Prop 13, is a law that dictates how the local assessors arrive at a property value every year. Prop 13 establishes a base year value for property tax assessments and limits the amount a property’s taxable value can rise every year.

What is Proposition 13?

Proposition 13 provides three important functions for property tax assessments in California.

1. All Real Property in California has established base year values
2. Prop 13 restricts the rate of increase on taxable value to no more than 2% every year
3. Limits property taxes to 1% of the assessed value (plus additional voter-approved taxes)

What is a Base Year Value?

When it was first passed into law in 1978, Proposition 13 set a “base year value” for every property in the state of California. What they did was roll back values to the 1975-1976 tax year to establish this base year value. Properties that have not been sold or had a change of ownership still have a base year value of 1975. 

When a change of ownership occurs, the real property is re-assessed at its current market value at the date of the sale. This transaction establishes a new base year value for the land parcel and the real property or improvements. If only a partial change in ownership occurs during a transaction, only part of the base year value changes that was affected in the sale.

In the case of new construction, this type of property gets re-assessed at current market value after completed. This year completed establishes a base year value.

Business personal property, airplanes, boats and other items are subject to yearly reappraisal during reassessments.

An Example of Two Office Owners

Let’s say there are two identical office buildings up for sale in 2010, both at $1,000,000. One sells, and the other doesn’t sell until 2016.

Buyer A buys one of the offices at $1,000,000 in 2010. In 2010, that purchase price would establish the new base year value. Over the next 6 years, that property, if it would increase by 2% every year, would arrive at a value in 2016 of $1,104,081. Buyer B buys the other office in 2016 for a price of $1,300,000. This purchase price would establish the new base year value on property 2.

In this scenario, 2016, Buyer A in 2016 would only pay property taxes on $1,104,081, but Buyer B would pay on $1,300,000 because a change of ownership as we discussed changes the assessed value of the property.