Save Taxes on Property Transfers


On June 6, 1978, the state of California voters approved a proposition known as proposition 13. This was created to stop the rapid rise in property taxes on California Real Property. The basic idea was to reduce property taxes, which at that time were averaging about 3% of market value, to 1% of market value. The idea was that only when property transfers to another person or entity would the property be reassessed for property taxes. With property transfers, the property taxes would then be raised to 1 % of the new reassessed amount. Although there are bonds and other assessments that can be added to the taxes, the new taxes would basically remain the same until the property transfers again. There are some other rules on cost of living type increases etc., but overall, this was the purpose for the Jarvis-Gann initiative.

Proposition 13 was named the “People’s Initiative to Limit Property Taxation”, and it was actually an amendment of the Constitution of California enacted during 1978, through the initiative process. It is interesting to note that it was even declared constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is now known as Article XIII A of the Constitution of the State of California.

What is most remembered about Proposition 13 is the first paragraph, which limited the tax rate for real estate, which reads as follows:

“Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.”

It turned out that Proposition 13 decreased property taxes by assessing property values at their 1975 value and restricted annual increases of assessed value of real property to an inflation factor, not to be more than 2% per year. It also does not allow reassessment of real property each year, as was allowed prior to the passing of the amendment to the constitution, unless there was either change in ownership, or the completion of new construction.

It turned out that upon passage of Proposition 13, property tax rates on homes, businesses and farms was reduced by about 57%.

It seems that there are several reasons given why Proposition 13 was enacted in the first place. There was a concern that seniors in Californians with fixed incomes should not lose their houses because of high property tax costs. It was stated by some that because of high inflation during the 1970s, reassessments of residential property increased property taxes so much, that some retired people could no longer afford to remain in homes which they may have purchased long before.

It seems that many Californians were also perturbed by the spending that the state of California’s government which had increased during 70s. It was a popular notion that Californians wanted a way to curtail continued government overspending.

Howard Jarvis and Paul Gann were the two advocates who were associated with pushing Proposition 13 through, thus, Proposition 13 became known as “Jarvis-Gann Amendment,” Once again, under Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This “assessed value” may be increased only by a maximum of 2% per year, until and unless the property has a change of ownership. At the time of the change in ownership the low assessed value may be reassessed to complete current market value that will produce a new base year value for the property, which would require a 1% tax. However, just as before, any future assessments are likewise restricted to the 2% annual maximum increase of the new base year value. Although the 1% rule is the general rule, the property may be reassessed under certain conditions other than a change of ownership, such as when additions are made to a home, or if there is new construction.

The property taxes may also come down if the market value of the property goes down below its assessed value as it did in 2008 – 2011. Although these reductions were not a part of Proposition 13, they came into play once Proposition 8 was passed in 1978, which amended Proposition 13. There were Property Tax reductions during 2009 and 2010 under these new amended rules.

With that background, we come back to our original question: Can you save taxes, by keeping the Property Taxes from going up, even if the property transfers out of your name. The Proposition itself would seem to say NO. However, in 1986 an amendment to Proposition 13 was approved which allowed for transfers between Parents