Question of the week: Will my property taxes go up because I refinance?
Answer: No. But that does not mean they cannot increase due to action by you, the property owner.
This question has been somewhat frequent this year as millions of homeowners across the country are refinancing for the first time as mortgage rates sank to, and remain at, historic lows. Most recently, friend Shaun asked as we discussed his options for refinancing the loan he used to purchase his home.
In October, when property tax bills were mailed, we covered property taxes and Prop 13 protection in our Weekly Rate & Market Update. Not covered in October is what could make your property taxes increase.
Back to Shaun’s question, will refinancing cause your property taxes to increase. The root of the question is concern by property owners that if the property value is re-evaluated by an appraiser to a value higher, especially significantly higher, than the assessed value that the state will re-assess the property to the higher appraised value and increase the property taxes.
Back to our October WR&MU, Proposition 13 protects property owners from large increases due to increasing property values. With no changes in to the property, Prop 13 limits increases to assessed value to 2% per year; if your assessed value was $400,000 in 2020, the most it can be assessed for in 2021 is $408,000.
Back to the source of the question. You purchased your home for $500,000 in 2013 with a rate of 4%. Today your home is worth $675,000. Per Prop 13, if the assessor maximized the increased in your assessed value each year your assessed value, increasing 2% per year, would be $574,343.
As part of your refinance, you are refinancing your currently $375,000 mortgage and you are obtaining $150,000 in cash to remodel your home. We have the property appraised, and the report values your home at $675,000.
The concern is that because there is an appraisal showing the property is valued at $675,000 the tax assessor will have knowledge of the report and reassess the value from current assessment of almost $575,000 to the appraised value of $675,000, an increase of $100,000, which would increase your property tax bill by $1250 per year, more or less.
First, as mentioned, Prop 13 does not allow an increase above 2% per year. Second, the assessor’s office does not see the appraisal. You can hand the assessor an appraisal for your home of $1.2 million, and your tax bill showing the assessed value is $575,000 and your assessed value will remain $575,000, and next year it will go up 2% to $586,500.
The attentive readers have been waiting to discover how actions on their part will result in their properties taxes increasing.
In our example above we had our borrower accessing $150,000 in equity to finance a home remodel. Depending on what that remodel entails, you might be reassessed and your property taxes will increase.
Prop 13 protects the maximum 2% increase in assessed value from acquisition price except when there is a change in ownership, or new construction on the property.
If the remodel in our example is adding square footage, making a substantial physical alteration of the land (such as adding a pool), making a substantial physical rehabilitation, renovation or modernization of any fixture that makes that fixture equivalent to a new fixture, your property can, and likely will be, reassessed.
How does the assessor know what improvements you have made to your home or property? Permits filed with the local building authority will state what remodel, renovation or home improvements you have undertaken. The assessor’s office reviews all permits when work is completed and make adjustments to your assessed value based on the improvements any additional square footage.
There are home projects that are exempt from reassessment. If you are remodeling or repairing the property as part of cosmetic or normal maintenance the work will not be result in your property being reassessed. For instance, if you replace your roof, install new appliances or replace the toilet and sink in a bathroom, you will not be reassessed.
Other exemptions from having your tax basis reassessed are adding solar panels, seismic retrofitting and if you have to do any rebuilding because of a disaster such as a fire.
Accessory Dwelling Units are being built by many property owners, and the State of California has passed legislation to increase the opportunity for their being built. If you build an ADU on your property, it will impact your property tax basis, but not as much as you may think.
You purchased your property in 2000, your property value is $850,000 and your assessed value is $500,000. You are able to build a 500 square foot ADU that will increase the value of your property to $925,000. The ADU is valued at $75,000. Does your property tax basis increase to the new value of $925,000?
When you add an ADU the state will calculate your property taxes using a blended assessment. A blended assessment is taking your current tax basis and adding to it the value of the improvement. In this case your current basis of $500,000 plus $85,000 for the value of the ADU puts your assessed value at $585,000.
The base property tax for the State of California is 1% of assessed value. Before the ADU was added your annual tax obligation to the state* is $5000, after you add the ADU it is $5850.
*But Dennis, my tax bill is about 1.25% of my assessed value, not 1% The additional 0.25% are taxes and assessments passed by voters, local governments and taxing authorities.
This is the part of the WR&MU where I disclose, I am not a tax expert, an attorney or accountant. If you are concerned about the tax consequences of any improvements or remodeling you are considering please consult with an expert in such matters.
If you have been avoiding refinancing because you are concerned about your property taxes increasing, do not wait any longer. Please call me and we can discuss you options.
Have a question? Ask me!
Covid continues to impact markets from social, economic and political fronts. On the social front, the FDA has cleared a vaccine that Pfizer has co-developed to be authorized, which could happen by the time you read this sentence.. Once approved state and local governments will determine which members of our society are first to be vaccinated. On the economic front, renewed lockdowns have slowed consumer and business activity. On the political front an agreement on a new stimulus package has apparently come down to two points. The Republicans want liability protections for businesses, schools and non-profits to operate without threat of litigation. The Democrats want additional funding for state and local governments to offset costs incurred and tax revenues lost due to the pandemic. Late yesterday Senate Republicans have offered to drop both issues from any bill to get one passed, we’ll see how today and the weekend goes in creating a compromise. As the wrangling continues on Capitol Hill, investors are not pushing markets one way or the other as they wait to see how big the stimulus package will be and who will get what. In the meantime, investors have priced a stimulus package into the markets, failure of a deal to come about before the next Congress, and the Senate run-off elections in Georgia, could/should, see stocks tumble and rate ease further.
Rates for Friday December 11, 2020:
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS: Rates remain flat from last Friday as investors are in a wait-and-see mode for a stimulus deal.
30 year conforming 2.50% Flat
30 year high-balance conforming 2.75% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Over the past several months I have been commenting, to those who care and listen, that a positive result of the pandemic and people staying at home is an increase in patience, acceptance and tolerant.
There is an awareness that no matter how difficult we find our particular situations, many have it worse. Yes, this has always been true, but most people, including myself, we not as conscious and aware of how relatively fortunate we are. You are not the only one working from home with your dog barking at a squirrel in the middle of your presentation, your internet crashing before you can finish an assignment, or sharing your office with a parakeet, two toddlers, the neighbor’s construction crew’s saws and hammers, and your spouse who often has calls at the same time as you. And these are those fortunate to still have work and employment.
I have noticed the new challenges we face, and share with our neighbors, co-workers, friends and families and stretching around the world, have softened our view of others. Softened our reaction to small mistakes, having to wait, orders not exactly right, tardiness to meetings or calls.
In essence, it appears we are more understanding that others are fallible, as are we; as such we are willing to extend to others the patience, acceptance and tolerance of their imperfections as we wish them to accept ours.
If I am correct, and this is a result of the pandemic, I really hope it lingers well beyond our getting back to “normal.”
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog