By CalTax Chief Tax Consultant David R. Doerr
Berkeley’s City Council recently voted to eliminate single-family zoning at the end of 2022, and other local governments may be tempted to follow suit as they look for ways to address California’s housing shortage. As the pros and cons are discussed, homeowners should be aware that zoning changes can trigger higher property taxes.
Before delving into the details, a refresher on Proposition 13 might be useful. Under the 1978 property tax limitation initiative, property is taxed at its “adjusted base-year” value – essentially, the market value (or use value for owner-occupied homes on land zoned for single-family use) when the property was purchased, adjusted for inflation up to 2 percent per year, and increased to account for any construction that added value (installing a pool, adding a bedroom or guest quarters, etc.).
When the current market value of a property is lower than the factored base-year value (if the housing market crashes a year or two after a home is purchased, for example) the owners get some relief, as the tax will be calculated based on market value. This is done on a year-by-year basis, so the previously described system kicks in again if the market value or use value subsequently surpasses the factored base-year value.
This is where zoning laws come in. State law requires that owner-occupied homes on land zoned for single-family homes must be assessed at “use value,” reflecting the fact that the only permissible use is for single-family homes. (Specifically, Article XIII, section 9 of the California Constitution states: “The Legislature may provide for the assessment for taxation only on the basis of use of a single-family dwelling, as defined by the Legislature, and so much of the land as is required for its convenient use and occupation, when the dwelling is occupied by an owner and located on land zoned exclusively for single-family dwellings or for agricultural purposes.” Revenue and Taxation Code section 401.4 states: “When valuing an owner-occupied single-family dwelling and the land on which it is situated that may be required for the convenient occupation and use of such dwelling, if such dwelling is on land which is zoned exclusively for single-family home use or which is zoned for agricultural use where single-family homes are permitted, the assessor shall not value the land at any value greater than that which would reflect the use of the land as a site for a single-family dwelling. As used in this section, owner-occupied single-family dwelling means any single-family dwelling occupied by an owner thereof as his principal place of residence on the lien date.”)
In areas without the single-family home zoning specification, county assessors value the property based on “highest and best use,” which isn’t necessarily the current use. The assessor might determine, for example, that the market value of an owner-occupied single-family home is extremely high because it could be developed into an apartment complex or office skyscraper.
The “use value” provisions of law were enacted after the Assembly Revenue and Taxation Committee held a hearing in Los Angeles in 1967 and found that owners of homes in an area of the San Fernando Valley dubbed “Watson’s Wasteland” (after Los Angeles County Assessor Phil Watson) faced massive property tax increases when they were reassessed as sites for apartments, gas stations or commercial development. It mattered not that they were on land zoned for single-family homes, because the assessor said the zoning could be changed, and he therefore had to use the “market value” under assessment practices required at the time.
Subsequent changes in law protected homeowners from assessment increases based on the idea that zoning could be changed. The protection is no longer in place, however, once zoning is changed to allow more uses of the property.
In areas where zoning for single-family homes is eliminated, taxes could skyrocket for both newly purchased homes and existing owner-occupied homes on land where the use value on the assessment roll currently is less than the Proposition 13 factored base-year value.
Most of the property tax increases from the zoning change are likely to be among owner-occupied single-family homes assessed below their factored 13 base-year values. With another recession, that number will increase – perhaps substantially. Other homeowners to get a property tax increase from the zoning change are single-family homeowners who purchased a home, for personal reasons, at a price greater than its use value.
The potential tax increases should be part of the discussion over zoning changes, but local government officials and the press might be unaware of these somewhat-obscure provisions of law. That means that for homeowners who see their property taxes increase, it likely will come as a very big surprise.