California ~ Property Tax: Value of Property Not Based on Purchase Price

CCH Tax Day Report

The California Court of Appeal, First District, held that, following the sale of real property in California, a county assessor was not required to adopt the purchase price as the property’s base year value for property tax purposes where the assessor rebutted the presumption that the purchase price represented the true taxable value of the property. Following the taxpayer’s purchase of the property, the assessor revalued the property for tax purposes in an amount significantly higher than the purchase price. The taxpayer claimed that the assessor was required to accept the purchase price of the property as its full cash value for purposes of reassessment. Specifically, he argued that when property is purchased in an open market transaction, the purchase price must be adopted as the property’s fair market value absent evidence of specific variables or factors that skewed the sale. However, in the court’s view, California law makes it clear that, while the purchase price is an important factor in determining the full cash value of property upon a change in ownership, it is never the absolute arbiter of value. Rather, if an assessor establishes that the transaction at issue was not an open market transaction, then the purchase price does not determine value at all, and the assessor must establish the full cash value of the property through other means. Moreover, said the court, even when a transaction appears to be an arm’s length, open-market sale, the presumption that the purchase price is indicative of the fair market value of the property is not absolute. Instead, under these circumstances, while the assessor is entitled to presume that the purchase price is equivalent to the property’s fair market value, such a presumption may nevertheless be rebutted by evidence that the price paid did not represent the full cash value of the property.

In the case at hand, through reference to comparable sales, the assessor provided evidence that the purchase price paid for the property in question deviated by more than 5% from its actual full cash value. Under such circumstances, the assessor’s approach—allowing for the successful rebuttal of the purchase price presumption through reference to comparable sales—was deemed by the court to be a valid method of valuation. The court also relied on Dennis v. County of Santa Clara, 215 Cal.App.3d 1019 (1989), which noted that California courts recognize that even an arm’s length, open market transaction may involve factors that skew the purchase price and make it an unreliable indicator of the fair market value. Finally, the court rejected the taxpayer’s argument that the assessment conflicted with the underlying principles of Proposition 13, which added predictability to property tax increases by capping real property taxes at 1% of a property’s full cash value, prohibiting reassessment except upon change in ownership or new construction, and restricting annual increases in taxable value. According to the court, while Proposition 13 did add predictability to the property taxation process, it did so by changing the property tax system from one based on current value to one based on acquisition value. Thus, property is assessed according to its value at the time it is acquired rather than to its value in the real estate market. Proposition 13 demands reassessment upon a change in ownership based on the property’s appraised value when purchased. Nothing in the initiative, said the court, allows a taxpayer to avoid this obligation, and the fact that the taxpayer may have gotten a good deal on the property does not insulate him from paying his fair share of property taxes based on the actual full cash value of the property at the time he acquired it.

Finnell v. County of Mendocino, Court of Appeal of California, First District, No. A139784, July 11, 2016, ¶406-527

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