Property Taxes in California Escrow: Key Considerations

Navigating the complexities of property taxes during the escrow process can be challenging for both buyers and sellers in California. Understanding the key considerations can help ensure a smooth transaction and prevent unexpected surprises.

1. Understanding Property Taxes in California

Property taxes in California are based on the assessed value of the property, which is typically 1% of the purchase price plus voter-approved bonds and assessments. This system is governed by Proposition 13, which limits the annual increase of assessed value to 2% unless there is a change in ownership or new construction.

2. Prorating Property Taxes in Escrow

During escrow, property taxes are prorated between the buyer and the seller based on the closing date. This ensures that both parties pay their fair share of taxes for the time they own the property. The escrow officer will calculate the prorated amount and include it in the closing statement.

3. Supplemental Property Taxes

In addition to regular property taxes, new homeowners may receive a supplemental property tax bill. This occurs because the property's assessed value is adjusted to the new purchase price, which may be higher than the previous assessed value. It is crucial for buyers to be aware of this potential expense, which is typically issued within a year of the purchase.

4. Impound Accounts for Property Taxes

Many lenders require an impound account (also known as an escrow account) to ensure property taxes and insurance are paid on time. The lender will collect a portion of the annual property tax and insurance premium with each mortgage payment and pay these bills on behalf of the homeowner.

5. Understanding Tax Liens

Property tax liens can impact the escrow process. If the seller has unpaid property taxes, a lien may be placed on the property. This lien must be paid off before the sale can be completed. The escrow officer will ensure all liens are satisfied before closing.

6. Tax Deductions for Homeowners

Property taxes are generally deductible for homeowners who itemize their deductions on their federal tax return. Understanding how to properly deduct property taxes can provide significant tax savings.

7. Changes in Ownership and Reassessment

When a property changes ownership, the assessed value is reassessed, which can lead to higher property taxes. Buyers should be prepared for this reassessment and plan accordingly.

Conclusion

Property taxes are a critical component of the real estate transaction process in California. By understanding these key considerations, buyers and sellers can navigate the escrow process more effectively and avoid potential pitfalls.