Prop 8 is a supplement or exemption to Prop 13 which still applies today to all property owners in California. Prop 13 was enacted in 1978 to control the amount of property taxes paid by taxpayers. Prop 8 is an exemption to Prop 13 which states that your assessed value should not be higher than market value for any given year. So, when the market is declining like it is today and has dipped below your current assessed value, you are entitled to some relief. This appears to be great news however, it is only a temporary solution.

Prop 8 is generally something you have to file for. The way Prop 8 works is like this, your valuation date for the current fiscal year is January 1st. So, the comparable sales for your property for Prop 8 purposes, need to have closed within the first three months of the year; from January 1 to March 31 for that given year based on the language of the law. For example to get a Prop 8 reduction for 2009, the comparable sales must have closed between January 1st, 2009 and March 31, 2009. Basically in order to get a reduction in value there has to be closed sales of similar properties within the first quarter of the designated year that are lower than your assessed value.

This is problematic for several reasons: one of the biggest is that the first quarter of the year has the fewest comparable sales because most of those transactions began during the holiday season. Real estate sales take 30-60 days to close, so many of the sales that close within the first quarter of the year opened escrow during the holiday season when the market is barely moving. So, there are less comparable sales to choose from. When the decline really starts to show during the second and third quarters of the year you are unable to use those comparable sales for a Prop 8 reduction.

The reason why this is not the best solution is that it is only a temporary reduction in value, as I stated earlier, so when the market starts to climb back up your old base value gets restored to what it would have been if it trended normally and you never had the reduction. Many alleged tax specialists pop up in declining markets claiming to be able to save you on property taxes. Unfortunately, people often pay good money to have their taxes lowered only to have their tax bills revert to higher rates once the market recovers.

Let me give you a typical example of prop 8 applied to a property. Let’s say, I bought a property in 2005 for $500,000, at a 2% trend my current assessed value for 2008 is now $530,604. Let’s say my market value as of the first of the year is around $430,000 and of course because I am a knowledgeable tax payer I apply for Prop 8 to get a reduction. So, for 2008 I get a nice tax break, I’m paying my taxes on a value that is $100,000 lower than my trended base value and saving at least $1,250 this year! Of course the market continues to decline and based on the assessor’s review, the Prop 8 value is maintained for 2009. So for 2009 I am paying again based on the $430,000 which is even better this year since my trended base in 2009 would be $541,216 and so I am saving at least $1,390! Awesome right!

Well, the market starts to turn around, and the values are climbing and for 2010 my market value is around $500,000, so the assessor adjusts my Prop 8 value to $500,000 which is lower than my 2010 trended base value of $552, 040. Definitely not as great as having $430,000 as my assessed value. However, I am still saving and this year since my Prop 8 value is $52,000 lower than my trended base value I am now saving $650 a year in paid taxes. Well, for 2011 the market is skyrocketing gain and now my market value is somewhere around $600,000 and so the assessor restores my value to the trended base, which for this year is $563,080. So, I am now paying $7,038 in taxes. I wish I still had that $430,000 base…

There is a way in California to permanently reduce your property tax base, utilizing Prop 13 and essentially bypassing Prop 8. Additionally, find out how to avoid reassessments when you have inherited property and also how to utilize all the exemptions allowed by Prop 13.