California Property Taxes Explained — Especially Supplemental Property Taxes

Buying a home in California comes with plenty of numbers: purchase price, down payment, mortgage payment, insurance, closing costs—and, of course, property taxes.

Property taxes are particularly important because the amount the previous owner was paying may be substantially different from what the new owner will eventually pay.

And then there is the bill that catches many new homeowners by surprise, the supplemental tax bills.   

How Are California Property Taxes Calculated?

California's residential property tax system is largely governed by Proposition 13.

Generally, the basic property tax is 1% of the property's assessed value, plus amounts necessary for voter-approved indebtedness, which are typically capped a .25% of assessed value. However, depending on the property, there can also be other assessments or charges such as a Mello Roos Bond or similar.  These Mello Roos bonds can often push the total property tax bill above that 1.25% threshold.

Property tax year runs from July 1st to June 30th of the next year and are billed  in advance and in 2 equal installments, first half due on 11/1 and late by 12/10, and the second half, due on 2/1 and late on 4/10.

When a property changes ownership, the County Assessor generally reassesses it at its current fair market value as of the date of the ownership change. For a typical home purchase, this is usually the purchase price, although the assessor—not the lender, real estate agent, or escrow company—determines the assessed value.

Once established, the property assessed value generally cannot increase by more than 2% per year for inflation, unless there is another qualifying change in ownership or qualifying new construction like a permitted addition or swimming pool, etc.

A Simple Example

Suppose you purchase a California home for $750,000.

If the property's new assessed value is $750,000, the basic 1% property tax would be

$750,000 × 1% = $7,500 per year

But that doesn't necessarily mean your total annual property tax bill will be exactly $7,500.

Voter-approved debt and other applicable assessments can increase the total amount by as much as another .25%, or in this case possibly an additional $1875. The actual tax rate and charges vary depending on where the property is located.

That is why I prefer to use the assessor's actual tax information when estimating a buyer's future housing expense rather than assuming every California property has exactly the same tax rate.  FYI-lenders will typically use 1.25% of the anticipated sales price to initially qualify you on a purchase--and estimated impound account numbers (if required or wanted), until more details are provided, during the home purchase process.

Why the Previous Owner's Property Taxes Can Be Misleading

This is extremely important for homebuyers.

Don't assume your property taxes will be the same as the seller's property taxes.

Suppose the seller purchased the property many years ago for $300,000 and you are buying it today for $750,000.  Because of Proposition 13, the seller's assessed value may still be relatively low compared with today's market value.

After the sale, the County Assessor generally reassesses the property based on its value at the time of the ownership change.  That can result in a substantial increase in property taxes for the new owner.

And that brings us to supplemental property taxes.

A supplemental property tax assessment is essentially California's way of adjusting property taxes after a property changes ownership or qualifying new construction is completed.

Instead of waiting until the next regular assessment cycle which runs from 7/1 to 6/30 of the next year, California uses the supplemental assessment system to put the property's new value into effect for the applicable portion of the tax year from the purchase date.

The supplemental assessment is based on the difference between the property's prior assessed value and its newly assessed value, with the resulting tax prorated for the applicable portion of the fiscal year.

Here's an Easy Example

Suppose:

Previous assessed value: $400,000
New assessed value: $750,000

The difference is:

$750,000 − $400,000 = $350,000

That $350,000 difference is the basis for the supplemental assessment.

The supplemental tax is then calculated using the applicable tax rate and prorated according to when the ownership change occurred.  So you aren't being taxed twice on the entire $750,000.

The supplemental bill is essentially making up the difference between the taxes based on the property's old assessed value and the taxes based on its new assessed value for the applicable period.

Why Did I Get a Supplemental Tax Bill After Buying My Home?

This is probably the most common question I hear about supplemental taxes.

You may have already paid all due property taxes through escrow at closing. You may also be making monthly property tax payments through your mortgage impound account.

Then, several months later, another property tax bill arrives.

Naturally, the first reaction is:

"Didn't I already pay my property taxes?"

Probably—but the supplemental tax bill is different.

The regular property tax bill may have been based on the property's previous assessed value.

Once the County Assessor processes the ownership change and establishes the property's new value, a supplemental assessment can be generated to account for the difference.

The supplemental bill is in addition to the regular annual property tax bill; it does not replace it.

Your Mortgage Company May NOT Pay Your Supplemental Tax Bill

This is one of the most important things for California homeowners to understand.

Even if your mortgage payment includes money for property taxes through an impound or escrow account, you should not assume your lender will pay a supplemental property tax bill.

Supplemental bills are generally sent directly to the property owner rather than the mortgage company, and county guidance specifically warns homeowners to contact their lender regarding responsibility for payment.

In fact, California's statutory supplemental-property-tax disclosure specifically warns buyers that supplemental bills are not mailed to the lender and that an impound account generally will not cause the lender to pay those supplemental bills automatically.

If You Receive a Supplemental Bill

Don't ignore it because you have an impound account.  Read the bill carefully and verify:

• The property address and Assessor's Parcel Number
• The previous assessed value
• The new assessed value
• The date of the ownership change
• The amount due
• The installment due dates

If you are unsure whether your lender will pay it, contact your mortgage servicer before assuming it will be handled through your impound account.

Why Can There Be TWO Supplemental Tax Bills?

This surprises some California homeowners even more.  Depending on when the property changes ownership and when the new assessment is processed, a homeowner can receive one or two supplemental assessments.

California's property tax fiscal year runs from: July 1 through June 30.

The supplemental assessment applies the new value to the appropriate portion of the tax year following the change in ownership.

For certain ownership-change dates, an additional supplemental assessment can apply to the following fiscal year as well. County tax authorities therefore caution homeowners that one or two supplemental bills may be generated depending on the timing.

So receiving a second supplemental bill does not automatically mean you were billed twice by mistake.

Look at the fiscal year and assessment period shown on each bill.

When Will I Receive My Supplemental Property Tax Bill?

Don't expect the supplemental bill immediately after closing.  The deed must be recorded, the ownership change processed, the property reassessed, and the resulting assessment transmitted through the county's property-tax system.

Consequently, the supplemental bill can arrive well after the home purchase closes, and in a busy real estate market these supplemental bills typically aren't issued by the County tax assessor until 6-12 months after closing!

This delay is exactly why buyers should know about supplemental taxes before purchasing the home.  A bill arriving months later can otherwise feel like an unexpected additional closing expense—even though it is really a property tax resulting from the reassessment.

Supplemental Taxes Can Also Result From New Construction

Supplemental assessments aren't limited to buying a home.  They can also result from completed new construction.

Examples can include substantial additions or improvements such as adding a room, garage, pool, or certain major renovations. The assessor determines whether the work constitutes assessable new construction and establishes the appropriate value.

The added value can then generate a supplemental assessment for the applicable portion of the fiscal year.

What If the New Assessed Value Is Lower?

Supplemental assessments do not always result in additional taxes.  If the reassessment produces a value lower than the value previously on the tax roll, the supplemental assessment can be negative, potentially resulting in a refund.

Importantly, a negative supplemental assessment does not mean you should reduce or ignore the regular annual property tax bill. The regular bill still needs to be paid according to its terms.

Don't Confuse Supplemental Taxes With Your Regular Property Tax Bill

Think of the two separately:

Regular property taxes are the ongoing annual taxes on the property.

Supplemental property taxes are typically a one time adjustment resulting from a change in ownership or completed new construction.

Receiving a supplemental bill does not eliminate your responsibility for the regular annual property tax bill.  Both may be due.

Property Taxes and Your Monthly Mortgage Payment

If you have a mortgage impound account, your lender generally collects approximately 1/12 of the anticipated annual property taxes each month as part of your mortgage payment.

For example, if estimated annual property taxes were $9,000:

$9,000 ÷ 12 = $750 per month.  That $750 would be collected with the mortgage payment and placed into the impound account so the servicer can pay the regular property tax bills when due.  But remember:

Your supplemental tax bill may not be paid from that account.  In fact, lenders often refund what they consider an impound account "overage" before the supplemental tax bills are created.  This can result in a "temporary" lower monthly payment!  But when the supplemental tax bills finally arrive, the lender then re-adjusts the impound account accordingly and the result is an even larger short term increase to the monthly payment and in most cases an escrow shortage.  So if you receive an impound refund check shortly after purchasing your home--beware the servicing lender will most likely want that back and more once they receive the supplemental tax bill.

Questions About Property Taxes and Your Mortgage Payment?

Property taxes are an important part of calculating your true monthly housing payment and determining how much home you can comfortably qualify for.

With more than 36 years of home loan experience, I can help you understand the numbers before you buy—including your estimated mortgage payment, property taxes, insurance, closing costs, and how supplemental property taxes may affect you after closing.

Everything explained. All your questions answered. No sales pressure.