by Kirsten Wolff
The wildfires that devastated over 240,000 acres in Sonoma, Napa, Mendocino and neighboring counties earlier this month destroyed thousands of structures and have caused untold damage to properties throughout wine country. The impact on the wine and tourism industries is likely to be great and will undoubtedly affect property values. In light of these conditions, property owners should be aware of several options they may have for relief from property taxes. A property owner may be eligible (i) to have the assessed value of the property adjusted, either because the property was damaged or destroyed, or because the property suffered a decline in value due to general market conditions, (ii) to defer his or her property tax payments, and/or (iii) if the property owner decides to move, to transfer the property tax base year value from the property that was damaged or destroyed to a new property. This article provides a broad overview of the applicable rules.
Reduction in Assessed Value
- Decline in Value – Calamity Reassessment
Any property owner whose property sustained damage in excess of $10,000 as a result of the recent wildfires is eligible to file an application for reassessment based on “misfortune or calamity.” This “calamity” reassessment must be claimed by filing the appropriate application with the county assessor within 12 months of the date of the fire. The claim forms are specific to each county but generally must identify the nature and extent of the damage, including an estimate of the cost to repair or replace the property, and a description of the property before and after the damage.
Once the assessor grants the claim for calamity reassessment, the assessor will reduce the assessed value of the property for property tax purposes to reflect the reduction in the value of the property. In a case in which a structure on the property has been completely destroyed, the entire value of the structure will be removed from the taxable value of the property.
If the property is later rebuilt or the damage repaired, the assessed value will be reinstated. If the building that was damaged or destroyed is replaced with a building that has a higher value than the original structure, the assessed value of the property will be increased accordingly.
- Decline in Value – Proposition 8 Reassessment
Even if a property was not destroyed (and did not incur damage exceeding $10,000), it may be possible to apply for a “decline in value” reduction in assessed value under Proposition 8, if the value of properties in the area has generally declined as a result of the impact of the fires. Of course, at this point is it impossible to know how the market will react, and perhaps the new scarcity in housing will push prices up. However, we have been advised by real estate appraisers that the damage caused by the fires to the wine industry and the tourism industry more generally may also result in a decline in property values in the range of 20% or more.
A Proposition 8 reassessment is only available when the current taxable value of the property falls below the current market value. Therefore, unless property values in wine country fall precipitously in the aftermath of the fires, only properties with relatively high taxable values will likely be eligible for reassessment under this rule. For example, a property that was recently reassessed at fair market value as a result of a change in ownership and has now suffered a decline in value as a result of the impact of the fires on general market conditions may be entitled to a Proposition 8 reassessment at the new (lower) fair market value.
As in the case of a calamity reassessment, any property benefitting from a Proposition 8 reassessment will be reviewed annually, and the taxable value will be readjusted as appropriate, up to (but never exceeding) the original base year value adjusted for an increase of 2% per year. For this purpose, we distinguish between the “base year value” of the property, which is determined by the fair market value at the time the property changes ownership, and the “taxable value,” which is the tax base in any given year. In the case of a Proposition 8 decline-in-value adjustment, the taxable value could be less than the base year value for a period of time. For example, assume a property has a base year value of $1,000,000 as a result of a change in ownership in year 1. The fair market value in year 2 is only $900,000, as a result of declining market conditions. Therefore, the property should receive a Proposition 8 reduction of the taxable value to $900,000. Assuming the market recovers in three years (i.e., by year 5), the taxable value will be readjusted to reflect the fair market value in year 5. However, the taxable value in year 5 may not exceed $1,082,432 (which is the maximum taxable value computed by applying a 2% year over year increase to the $1,000,000 base year value in year 1).
A property owner must request a Proposition 8 reassessment from the county assessor. Each assessor has specific rules and procedures for Proposition 8 reassessments. The County of Sonoma Assessor’s Office provides guidance regarding Proposition 8 adjustments here, and Napa County provides guidance on Proposition 8 adjustments here.
Property Tax Deferral
A property owner who qualifies for a “calamity” reassessment may also be entitled to defer payment of his or her first property tax installment (which would otherwise be delinquent if not paid by December 10) until 30 days after the assessor provides an adjusted bill that reflects the reduction in value based on the calamity. This relief may not be available in all counties.
Transfer of Base Year Value to a New Property
Finally, if a property owner whose property is destroyed or substantially damaged chooses to relocate rather than rebuild, that person may be entitled to transfer the base year value from the damaged property to a new property within five years. The replacement property must be within the same county or in a county that has entered into an agreement to accept base year value transfers from the original county. In the case of transfers from one county to another, this rule only applies to a property that was the principal residence of the owner.
Property owners in wine country may be eligible to obtain some relief from property taxes in the aftermath of the fires under one or more of these provisions. Please contact us if you have questions or need assistance with evaluating the potential options in a particular situation.