Prop 13: Why California residents should own real estate

If you live and work in California and you don’t own real estate, you’re getting screwed. Let me explain:

California residents, furious about rapidly increasing property taxes in the 1970’s, passed Proposition 13 in 1978. The law does the following:

  • Causes real estate to be assessed for tax purposes at the time of purchase
  • Limits property tax to roughly 1.25% of the original purchase price
  • Limits tax increases to roughly 2% per year

Here’s an example of how the law works in practice: Let’s say you bought a beach house in Malibu in 1979 for $250,000. Your taxes that first year were 1.25% of $250,000, or $3,125 per year. After 32 years, your taxes are now $5,889 per year. Seems like a big jump, right?

Wrong. $5,889 is 1.25% of $471,000, so the state is implying that your beach house in Malibu is worth $471,000. Now, we all know that your beach house is worth A LOT more than that — maybe $5 or $10 MILLION. But because of Prop 13, the state can’t re-assess the beach house to its real value until you sell it.

Most states get most of their tax revenue from property taxes. When property values go up, they simply re-assess the owners and collect more money. But, because California can’t raise taxes by more than 2% per year unless there’s a sale, it needs to get money some other way. And that’s how you get screwed.

The main sources of additional revenue for California are sales tax, income tax, gasoline tax, and various fees (for example, for registering your car). When expenses go up by more than 2% per year, California has no choice but to raise non-property taxes to make up the difference.

So, if you don’t own property but do have a job and buy things, you’re subsidizing government for those of us who do own property. Don’t feel like subsidizing everyone else with your tax dollars? Start thinking about owning property.