PROPERTY TAXES

PROPERTY TAXES

Property taxes are levied according to the value (ad valorem) of the property as of the date acquired, or the date
of completion of any new construction. Generally, the more valuable the property and/or the more current its
acquisition or construction date, the higher the tax. Property taxes, including Property Tax in-lieu of Motor
Vehicle License Fees, represent a major source of income for counties in California. Approximately half of
California’s one hundred million acres are owned by governments and therefore exempt from property taxation.
All property within the jurisdiction of a taxing authority is taxable unless specifically exempt.

California’s Property Taxes

In June of 1978, California voters approved Proposition 13, amending the State Constitution so that the
maximum annual tax on real property is limited to one percent of “full cash value” (market value) plus a
maximum of two percent annual inflation factor based on the Consumer Price Index (CPI), as calculated by the
California Department of Industrial Relations. (Sections 51 and 110.1) An additional sum is allowed to pay for
indebtedness on affected property approved by voters prior to the passage of Proposition 13. Also, selected new
indebtedness is allowed, only by a two-thirds vote of the residents affected. The passage of Proposition 39 in
2000, authorizes bonds for repair, construction or replacement of school facilities, classrooms, if approved by
55% local vote for projects evaluated by schools, community college districts, county education offices for
safety, class size, and information technology needs.

Property Tax Liens

Property taxes become liens against real property on January 1 of the year preceding the fiscal year (July 1 -
June 30) for which the taxes are levied. One-half the taxes on real property are due on November 1 and payable
without penalty until 5 p.m. (or close of business, whichever is later) on December 10. The second half is due
on February 1 and is delinquent if not paid by 5 p.m. (or close of business, whichever is later) on April 10. If
either December 10 or April 10 falls on a Saturday, Sunday, or legal holiday, the time of delinquency is
extended until 5 p.m. (or close of business, whichever is later) on the next business day. A ten percent penalty
applies to an installment that becomes delinquent. If the second installment is delinquent, the tax collector adds
a charge to place the property on the delinquent roll.

The Morgan Property Taxpayers’ Bill of Rights

The Morgan Property Taxpayers’ Bill of Rights (Section 5900, et seq.) and the related amendment to
subdivision (e) of Section 408 require that the assessor allow, upon request of an assessee (or his/her designated
representative), inspection and copying of documents, including an auditor’s work papers, relating to the

appraisal and assessment of assessee’s property. Further information concerning taxpayers’ rights relating to the
assessment, audit, and collection of property taxes in this state may be obtained from the State Board of
Equalization, Taxpayers’ Rights Advocate’s Office, P.O. Box 942879, Sacramento, CA 94279-0070.
Telephone: (800) 400-7115, www.boe.ca.gov.

Establishing Values

Operating under constitutional provisions and statutes, assessors have established real property values as
follows:

No change in parcel since February 28, 1975. If the parcel has not been further improved with structures and
has not been sold or transferred since February 28, 1975, the assessor has established a base value for the parcel
and then has applied an inflation rate to that base year value not to exceed 2% per year. Thus, the base year
value is locked in place and cannot be changed unless there is a change in ownership or new construction.

Parcel sold/changed ownership since February 28, 1975. If a parcel has sold or otherwise changed
ownership since February 28, 1975, its new base year value as of the date of change of ownership is enrolled
for the following lien date and shall be adjusted upward by up to 2% each year.

New construction. If the improvement on the parcel was newly constructed since February 28, 1975 and the
parcel remained in the same ownership prior to and after the construction, only the added “new construction”
receives a new base year value. The land may have one base year for valuation purposes while the
improvements constructed may have another. Only if the improvement is completed in the same assessment
year that the parcel is purchased would the land and improvement have the same base year. “New construction”
could also apply to land that has been significantly altered.

There are certain improvements which have been excluded from the definition of “new construction” for
purposes of reappraisal:

1. water conservation equipment for agricultural use;

2. fire detection or extinguishing systems or modification for fire-related egress;

3. modification for access by disabled person; and

4. seismic retrofitting

5. normal maintenance and repair

6. construction or addition of any active solar energy system, as defined in subdivision (b) of Section 63 of
the California Revenue & Taxation code

7. disabled person accessibility

8. environmentally contaminated property

Parcel further improved since February 28, 1975 (or since constructed, sold or transferred). If the parcel
has been further improved (e.g., by an addition or swimming pool) since February 28, 1975 (or since
constructed, sold or transferred), it has a 1975 base value year (or year of sale, construction or transfer) and an
additional base year value on the new improvement.

Change in Ownership Exclusions. There are a number of exclusions from change in ownership and
consequent reappraisal, some of which are described as follows:

1. Acquiring “comparable” replacement property for original property taken by a governmental agency in
eminent domain actions, per Section 68.

2. Replacing property destroyed by disaster. Section 69 requires comparable replacement property to be
acquired or newly constructed within 3 years of property substantially damaged or destroyed by governor-
declared disaster. Section 69.3 permits counties to enact ordinances allowing such replacement property
transfers from other counties. Section 70 requires that reconstructed property that is substantially
equivalent to damaged property is not reassessed “new construction.”

3. Transferring the principal residence and first one million dollars of full cash value of real property between
parents and their children pursuant to Section 63.1, provided that a claim for the exclusion is filed with the

assessor within 3 years of the date of transfer or within 6 months after the date of mailing of the notice of
supplemental or escape assessment.

Subject to subparagraph (B) of Section 63.1, transfers occurring on or after March 27, 1996 , between
grandparents and their grandchild or grandchildren, if the parents of that grandchild or those grandchildren,
who qualify as the children of the grandparents, are deceased as of the date of purchase or transfer All
parents do not have to be deceased. The child of the grandparent need only be single. As of January 1,
2006 if the child is married to a step-parent of the grand-child, a grandparent to grandchild exclusion will
also apply.

4. Transferring the base year value of one’s home (original property) to a replacement property for persons
over 55 or disabled persons who sold their original property pursuant to criteria in Section 69.5. Section
69.5 also allows a county board of supervisors, after consultation with affected local agencies located
within the boundaries of the county, to adopt an ordinance that authorizes the transfer, subject to the
conditions and limitations of this section, of the base year value of property that is located within another
county in the State of California. Currently there are 8 counties (Alameda, San Diego, Santa Clara, Los
Angles, San Mateo, Ventura, Orange and El Dorado) that have ordinances permitting intercounty transfers
of base year values. Since the counties authorizing the transfers are subject to change, it is recommended
you contact the county to verify current eligibility.

5. Transferring real property to a spouse per Section 63, or transferring real property into a trust where the
trustor/transferor is the sole present beneficiary of the trust or the trust is revocable by the trustor pursuant
to subdivision (d) of Section 62.

6. Transferring real property to a partnership or other legal entity by maintaining exactly the same
proportional interests of the transferors and transferees, resulting solely in a change in the method of
holding title, under Section 62(a)(2).

Reduction of value. Assessors must recognize declines in value. Under Section 51, the “taxable value” is the
lower of the base year value (compounded annually) or the full cash value (defined in Section 110) whichever
is less. It may be necessary for the property owner to expressly bring the decline in value to the assessor’s
attention. The county board of equalization is required to hear applications for reduction in assessment.

Exemptions

There are numerous properties that are assessed but are partially or totally tax-exempt, as well as some kinds of
real and tangible business and personal property that are neither assessed nor taxed. Under Section 218, the
homeowner’s exemption of the first $7,000 of full value applies to each residential property that is owner-
occupied on the lien date and meets other qualifying tests. (This includes an owner-occupied unit in a multiple
unit residential structure, an owner-occupied condominium, cooperative apartment, or unit in a duplex). Once
claimed, the homeowner’s exemption remains in effect until terminated. Termination of the homeowner’s
exemption can be triggered by a change in title-holder, even if temporary. Each homeowner is responsible for
notifying the assessor that the property is no longer eligible for exemption. An escape assessment plus a 25
percent penalty and interest may result from failure to notify the assessor of the ineligibility.

Section 205 provides an exemption of up to $4,000 of full value of any property subject to property tax (real,
personal, boats, planes, etc.) owned by qualifying veterans or the unmarried spouses of deceased veterans. This
exemption results in a tax savings of up to $40. The limitations are that it cannot apply to a property on which
the homeowner’s exemption has been successfully claimed. And for a non-home owning veteran to qualify,
there is a personal wealth cap of $5,000 for an unmarried veteran and $10,000 for a married veteran.. In
computing the $5,000 or $10,000 property limitation, one-fourth of the assessed value of the taxable property
and the full value of nontaxable property is used. Section 205.5 provides an exemption for disabled veterans
and/or their unmarried surviving spouses, as follows: depending on veteran’s income and extent of disability
(resulting from injury or disease incurred during military service), a disabled veteran may receive an exemption
of $40,000, $60,000, $100,000, or $150,000 of the full cash value of his/her residence. The county assessor can
provide application forms and other information regarding the disabled veteran’s exemption.

All growing crops, fruit, and nut-bearing trees less than four years old and grapevines less than three years old
are exempt. Properties held or exclusively used for human burial or owned by nonprofit entities, including
certain nursery and kindergarten-to-12th grade schools, hospitals, churches, nonprofit private schools and

colleges are exempt. Timber is no longer subject to property tax, but owners pay a yield tax on downed or
felled timber. However, timberland remains taxable. Public open-space lands used solely for recreation are also
exempt.

Supplemental Assessments

New procedures for enrolling adjustments to assessed valuations of real property have been used by assessors
since 1983. Prior to the enactment of the supplemental assessment system, when a change in ownership or
completed new construction occurred, increases in base year value were often delayed from 4 to 16 months,
resulting in an unwarranted reduction in taxes for some, with a proportionate (and inequitable) shift of the tax
burden to others.

The Legislature solved this inequity through Sections 75, et seq., under which assessors appraise at its full cash
value real property which has changed ownership or is newly constructed as of the date of the event. Added
taxes become due on the date the change in ownership occurs or the new construction is completed. This is
done by issuing a supplemental assessment to be added to a supplemental tax roll. The value determined
becomes the new base year value of the transferred or newly-constructed property. Just as for regular
assessments, there are appeal procedures for protesting supplemental assessments.

If reassessment takes place between January 1st and May 31st, inclusive, two supplemental assessments are
made (and the taxpayer receives two supplemental bills). A reassessment occurring between June 1st and
December 31st, inclusive, generates only one supplemental assessment.

If a property changes ownership more than once during an assessment year, or if there are multiple completion
dates for new construction during an assessment year, or any combination of transfers and construction, a
supplemental assessment is made for each occurrence.

Supplemental assessment of property that has decreased in value results in the auditor issuing a partial refund of
taxes paid in advance. The refund is sent to the new owner, not the original taxpayer. In the event of a
foreclosure and a subsequent sale the refund will be prorated.

New construction is excluded from supplemental assessment (under the “builder’s inventory exclusion –
Section 75.12) if the owner will not occupy but intends to market the improvement, and has so notified the
assessor in writing prior to or within 30 days of the date of commencement of construction. When the newly-
constructed improvements are transferred, leased or rented, a supplemental assessment is made as of that date.

County assessors are generally alerted to changes in ownership and construction starts through recorded
documents and permits. When the assessor determines that an ownership change or new construction
completion has occurred, the assessor:

1. places the supplemental assessment information on the roll;

2. notifies the auditor, who places an appropriate notation on the current roll or on a separate document kept
with the roll; and

3. sends a prescribed notice of supplemental assessment to the assessee.

The notice includes the new base year property value, the taxable value appearing on the current roll and/or roll
being prepared, information concerning the assessee’s right to review and to appeal the supplemental
assessment, and the procedure for filing a claim of exemption. If the property has decreased in value and the
supplemental assessment is a negative amount, the notice will advise the assessee that a refund will be made.

Filing a Change in ownership Statement. Section 480 requires that any person acquiring any interest in real
property or a manufactured home taxed as real property must file a change in ownership statement with the
county recorder or assessor. The change in ownership statement must be filed either at the time of recording, or
if the transfer is not recorded, within 45 days of the date of the change in ownership. Failure to file a change in
ownership statement within 45 days from the date of a written request by the assessor will result in a penalty of
one hundred dollars or ten percent of the taxes applicable to the new base year value, whichever is greater.

If the transfer is occasioned by a death, and probate is not involved, the transferee (or trustee, if applicable) has
150 days from the date of the death to file the change in ownership statement. If the property is subject to
probate, the statement must be filed prior to or at the time the inventory and appraisal are filed with the court.

Sections 480.3 and 480.4 require that county assessors and recorders make available to property buyers a
“Preliminary Change of Ownership Report” form. This form is to be completed by the buyer prior to transfer of
the property. If a document evidencing a change of ownership is presented to the recorder for recordation
without the concurrent filing of this preliminary change of ownership report, the recorder may charge an
additional recording fee of twenty dollars.

Statute of limitations on Escape and Supplemental Assessments. Section 532 provides assessors a four-year
statute of limitations for the enrollment of escape assessments. In cases of concealment or not filing a change of
ownership statement for an unrecorded change of ownership the statute of limitations is eight years. The
enrollment period is unlimited when a change of ownership statement is not filed for a recorded change of
ownership.

Section 75.11 (d) allows assessors four years to enroll supplemental assessments or eight years in cases of
concealment or not filing a change of ownership statement for an unrecorded change of ownership. The
enrollment period is unlimited in case of fraud.

In both cases, the statute of limitations for making escape and supplemental assessments does not begin to run
until July 1 of the assessment year in which the event occurred.. Where, for example, a change in ownership
occurred in 1992, and a change in ownership statement reporting it was filed, the assessor has only four years
from 1992 to enroll escape and supplemental assessments. If the change in ownership statement reporting it was
not filed, then assessor must enroll escape and supplemental assessments for all of the years since 1992,
including the year of discovery. The assessor’s statute of limitations does not commence until. July 1 of the
assessment year in which the event occurred.

If non-reporting occurs because of a fraudulent act or omission, the penalty of 75 percent of the additional
assessed value under Section 504 is added to the escape and supplemental assessments. The supplemental
assessment must be made within eight years, on or before the eighth July 1 following the July 1 of the
assessment year in which the event giving rise to the supplemental occurred, and the escape assessment must be
levied eight years after the July 1 of the year in which the property escaped taxation.

Postponement (Sections 20581, et seq.)

Senior citizens (62 years of age or older) and persons who are blind or disabled may defer payment of taxes on
their residences. To qualify, an individual must own and occupy the home, have at least a 20% equity in the
property (using the assessor’s full value as the standard), and have a yearly total household income of $35,500
or less for calendar year 2007. If married, only one spouse need qualify.

In applying the law, a lien in favor of the State of California is placed against the property and an interest rate
determined by the rate earned by the Pooled Money Investment Fund is charged. The postponed taxes and
interest are not recovered until the property is sold.

Complete information about the deferral program is available from the State Controller’s Office at P.O. Box
953, Sacramento, CA 95812. The toll free telephone number is 1-800-952-5661. Information is also available
on the California State Controller’s website at http://www.sco.ca.gov/col/taxinfo/ptp/index.shtml.

Tax Sale (Sections 3351 - 3972)

County tax collectors, not assessors, are charged with the responsibility of administering the law pertaining to
the sale of all properties that are “tax-defaulted” when five or more years have passed since the property taxes
were paid. The tax collector is required by law to attempt to sell within two years all properties which have
become tax defaulted and subject to the power to sell. The tax collector may sell properties to any person at a
public auction or under special circumstances, to adjoining property owners at a sealed bid sale. The minimum
price at which property may be sold at public auction is the sum of all taxes, penalties, costs and fees as
defined.

The minimum bid has to be approved by the County Board of Supervisors. After authorization by the State
Controller, the tax collector publishes or posts the required notices, setting the date of sale. At the sale, the
amount of the highest bid must be paid in cash or negotiable paper, or any combination thereof which the tax
collector specifies. Upon completion of the tax sale, the purchaser receives a tax deed conveying title free of all
encumbrances of any kind existing before the sale, except those shown in Section 3712.

If a tax-defaulted property is unusable because of size, location, or other conditions, the tax collector may sell it
at a sealed bid sale to contiguous property owners at a price established by the tax collector.

Buyers of tax-defaulted properties may include taxing agencies, revenue districts, and certain non-profit
organizations. In the case of residential property, the sale to a non-profit organization is conditioned upon the
rehabilitation and subsequent sale of the property to low-income persons. In the case of vacant property, the
non-profit organization must either construct a residential building on the property and sell the property to low-
income persons or dedicate the vacant property to public use.

Redemption (Sections 4101, et seq.)

Tax-defaulted real property may be redeemed upon payment of taxes, interest, costs and redemption penalties.
Redemption payment is made to the county tax collector, who then issues a certificate of redemption as
evidence of payment. Any person may elect to pay delinquent taxes in installments under article 4217 at any
time prior to 5 p.m. on June 30 of the firth year after the property became tax defaulted.

Delinquent taxes, costs, interest and penalties may be paid in five annual installments if the current taxes are
paid. Persons electing to pay delinquent taxes in installments may be subjected to a fee for processing their
request.

If the property has not been redeemed within five years after the initial declaration of default, the property will
become subject to the tax collector’s power to sell. The right of redemption terminates at the close of business
on the last business day prior to the date a tax collector’s auction begins. If the property is not sold, the right of
redemption is revived. If the property is redeemed, the tax collector will execute and record a “Rescission of
Notice of Power to Sell Tax-Defaulted Property.”