Saturday, October 14, 2006

Property Tax Primer: Supplemental Tax Bills

Part 2 of 3

If you have followed along so far, you have read that in San Francisco the assessed value of your home is the cash or market value at the time of purchase, and your property tax calculation is based on that assessment.

California State law requires "the reassessment of secured property as of the first day of the month following an ownership change." That means the first day of the month after you close on your TIC your property tax starts accruing based on your purchase price. This results in what the City calls a Supplemental Property Tax Bill.

For example, let's say the former owner purchased your 4-unit building 20 years ago for $100,000. In year 20 he decides to sell off the units as TICs. On September 15 the new TIC partners close the sale on each of the units, paying $500,000 each. As of October 1, the City starts clocking the property tax (in 2004-2005 the rate was 1.144%) on the additional $1,900,00.

However, it often takes the city some time to catch up with the billing that corresponds with the new assessment. The SF Tax Collecter's website notes, "A new property owner may receive one or two (sometimes three) supplemental tax bills depending on the date of purchase."

That means the first six months to a year you might receive bills based on the previous owner's much lower assessed value. And then suddenly, wham, you are going to receive bills for some or all of those back taxes. Based on our example, 1.144% of $1,900,000 is $27,360. If all the parters hold an equal 25% interest in that theoretical TIC, they could each be responsible for as much as $6,840 in Supplemental Tax.

When forming a new TIC each owner should calculate this into his or her individual startup costs. Make sure that after writing the checks for your down payment and closing fees you have enough set aside for the first year's property tax. The group would ideally fund the house account with those monies shortly after closing, even though the Supplemental Tax bills will likely not arrive until much later.

If you are buying into an existing TIC group, the same principle holds true, except as the new buyer only you will be held responsible for the Supplemental Tax. Sticking with our 4-unit example, let's say four owners paid $200,000 for their units ten years ago. In year ten, you purchase a unit for $500,00 from one owner. The City will view that transaction as adding $300,000 to the building's value. You alone will be expected to pay any Supplemental Tax bills for that additional $300,000 in assessed value.


Post a Comment

<< Home