California’s Proposition 13 has long provided property owners with tax relief by limiting annual increases in assessed value and capping the property tax rate. For many homeowners, this protection translates into thousands of dollars in savings each year. However, these benefits aren’t guaranteed forever.
There are specific circumstances under which a property can lose its Prop 13 protections, often resulting in a reassessment and higher taxes. Understanding what actions or changes might trigger this loss is important for anyone looking to maintain their current tax advantages.
Transfer of Title
A common way California property owners lose Proposition 13 protection is through a transfer of title. When property ownership changes, a reassessment to current market value at the time of transfer is triggered. This new value becomes the baseline for future property taxes, resetting the prior owner’s Prop 13 benefits.
A change in ownership, as defined by California law, involves the transfer of a significant interest in the property, including its beneficial use.1California Public Law. California Revenue and Taxation Code Section 60 While not all title transfers cause reassessment, many common ones do, such as sales between unrelated individuals. Certain inheritances, excluding those to a spouse or registered domestic partner, are also considered changes in ownership. Transfers to children or grandchildren can also trigger reassessment, subject to specific exclusions. For instance, creating or terminating a leasehold interest of 35 years or more is considered a change in ownership.2Cornell Law School Legal Information Institute. Cal. Code Regs. Tit. 18, § 462.200 – Change in Ownership—Miscellaneous Arrangements
Major Structural Changes
Significant physical modifications to a property can also affect its Proposition 13 assessed value. Substantial alterations or additions trigger a reassessment, which is limited to the value of the new improvements.
Original portions of the property retain their existing base year value, while newly constructed elements are valued at current market worth upon completion. This approach preserves tax benefits on the existing structure while taxing new additions at present-day value. California law defines new construction as any addition to real property or any alteration making the property substantially equivalent to new.3California Public Law. California Revenue and Taxation Code Section 70 This includes additions like a new room or significant modernizations, but not routine maintenance such as roof replacement or painting.
The county assessor determines if the work qualifies as new construction and its fair market value. This valuation sets a new base year value for the improved part only; land and pre-existing, unaltered improvements keep their original base year value. Major structural changes, therefore, result in a targeted reassessment of the improvements, not a complete loss of prior protections for the entire property.
Conversion of Property Use
A significant shift in a property’s use can also lead to reassessment under Proposition 13. Changing a property’s function, for example from residential to commercial or agricultural to residential, can trigger a new base year value.
Such conversions are treated as a form of new construction because they alter the property’s utility and market value.4California State Board of Equalization. Property Tax Rule 463: Newly Constructed Property When a property is converted to a different use, the converted portion is reassessed at its current fair market value once the conversion is complete and the property is ready for its new function. Examples include converting a home into an office or transforming farmland into a shopping center.
This type of reassessment focuses on the value change resulting from the new use. If the entire property is converted, it may lead to a full reassessment. However, if only a portion is converted, only that part is reassessed, while unaffected parts can retain their original Proposition 13 base year value.
Noncompliance with Required Paperwork
Failing to comply with California’s property tax reporting requirements can lead to the loss of Proposition 13 benefits and higher tax bills.
When a change in ownership occurs, a Preliminary Change of Ownership Report (PCOR) is filed with the County Recorder.5Santa Clara County Assessor’s Office. Preliminary Change of Ownership Report (PCOR) BOE-502-A If a PCOR isn’t filed or is incomplete, the assessor mails a Change in Ownership Statement (COS) to the new owner, who has 90 days to return it.6California Public Law. California Revenue and Taxation Code Section 480 These forms provide assessors with details about the transfer.
If a required COS is not returned on time, the assessor may estimate the property’s value. If a qualifying change in ownership is found, the property will be reassessed to its current market value at the date of the change. This means the new owner loses the previous owner’s lower base year value and faces increased taxes.
Failure to file a COS on time can also result in direct financial penalties, even if no reassessment is triggered. The penalty is the greater of $100 or 10 percent of the taxes on the new base year value.7California Public Law. California Revenue and Taxation Code Section 482 This penalty is capped at $5,000 for properties eligible for the homeowners’ exemption, or $20,000 for other properties, if the failure wasn’t willful.
Noncompliance is particularly impactful for transfers that might otherwise be excluded from reassessment. California law offers certain exclusions, such as those for parent-child transfers. However, Proposition 19, effective February 16, 2021, significantly modified these rules.8California State Board of Equalization. Proposition 19 Overview For parent-child transfers, the child generally must use the inherited home as their principal residence to claim the parent’s tax base, and other limitations may apply. To use such exclusions, owners must file specific and timely claim forms with the county assessor. Incorrect or late filings can lead to denial of the exclusion, resulting in reassessment.
Legal entities like corporations or LLCs that own California real property also have reporting duties. They must file statements with the State Board of Equalization upon a change in control or a cumulative transfer of over 50 percent of ownership interests.9California State Board of Equalization. Statement of Change in Control and Ownership of Legal Entities (BOE-100-B) Failure to file can lead to penalties and, if a reassessable event is discovered, the entity’s real property will be revalued to its current market price, establishing a new, higher base year value.
Loss of Primary Residence Status
A property’s status as an owner’s primary residence is connected to certain Proposition 13 advantages. If a property stops being the primary residence, its taxable value may be reevaluated.
One benefit tied to a property being a principal dwelling is the homeowners’ exemption, provided under California law, which reduces the assessed value of a homeowner’s principal residence by $7,000. To qualify, the owner must occupy the dwelling as their principal residence on the January 1 lien date. If this condition is no longer met, for instance, by moving or converting it to a full rental, the exemption is lost.
More significantly, losing primary residence status impacts intergenerational transfers that were previously excluded from reassessment. Proposition 19, effective February 16, 2021, substantially altered these rules. Under Proposition 19, the exclusion for transfers of a principal residence between parents and children (or from grandparents to eligible grandchildren) now requires the recipient to use the inherited property as their principal residence to benefit from the transferor’s tax base (with certain value limitations).10California State Board of Equalization. Proposition 19 Intergenerational Transfer Exclusion Guidance Q&A
If an heir initially qualifies for this exclusion by making the inherited property their principal residence but later stops using it as such, the property may be reassessed. The exclusion generally applies only if the property becomes and remains the transferee’s family home. If the heir moves out, rents the property, or establishes a new principal residence elsewhere, the conditions for the inherited base year value may no longer be met. The property could then be reassessed to its fair market value at the time primary residence status is lost, or potentially from the inheritance date if the requirement was not continuously met. A principal residence is defined as one’s true, fixed, and permanent home, indicated by factors like voting registration and mailing address.
Therefore, a property’s ongoing status as a primary residence is not just for the homeowners’ exemption; it is now a condition for preserving certain inherited Prop 13 tax benefits under Proposition 19. Changing this status can undo the reassessment protection granted at transfer, leading to a new base year value and increased property taxes.