A new homeowner has a lot to learn. The home buying process itself can be a steep learning curve. That’s one of the main reasons it is essential to work with an agent that spends the time to guide you through the entire process and explain all the terminology. There should never be any surprises. And yet, we often hear new homeowners completely blindsided by a supplemental tax bill. Let’s define what supplemental taxes are, how they are calculated, and when they are expected.
The history behind supplemental taxes
Governor Jerry Brown introduced the Supplemental Real Property Tax Law in 1983 to fill the gap between when a home’s value increases from improvements or a sale and the next tax year. Jerry estimated this new law would generate $300 million additional revenue each year. The proceeds of this additional revenue go to help fund California schools.
How to assess supplemental taxes
Under Prop 13, there is a 2% limit to property tax growth per year. When ownership changes (ie. you sell or buy a home), Prop 13 requires the assessor’s office to realign a property’s assessed value to the updated market value.
Supplemental taxes are not just for the transfer of titles. These taxes also apply for major improvements to your home that increase the value of the home.
Learn more about SF property taxes here.
How to calculate supplemental taxes
In order to calculate the supplemental taxes owed apply the current tax rate to the new assessed value and then prorating it for the amount of time the home is owned in that tax year. See below for an example from San Francisco assessor, Carmen Shu.
As a homeowner, you are responsible for paying taxes on the assessed value of your home. Any new construction or major improvements to the home will result in an increase in your home value and your assessed tax rate.
When you sell your home, it is most common that at the time of escrow, you will be reimbursed for the tax your paid for the fiscal months you no longer own the home.
Know that when buying a home you are responsible for reimbursing the previous home owner for the taxes paid on the home through the rest of the fiscal year. Chances are, the home you are buying has gone up in value since the previous owner bought it. This means not only are you responsible to reimburse what the previous owner paid, but you must also cover the increased value that you paid on the home.
When are supplemental taxes due?
Supplemental taxes will be due after a change of ownership or when new construction is completed. In the likely event the property is assessed at a higher value, a supplemental bill be issued. Depending on when the bill is sent, changes when the bill is due. See below from the SF Treasurer website.
Do I pay supplemental tax every year?
No. The supplemental tax bill is sent in addition to the annual tax bill and both must be paid. However, a supplemental tax bill only happens after new construction or a reassessment due to a change in ownership.
Do I have to pay my Supplemental Tax Bill all at once?
You are able to pay in two equal installments on specified dates depending on the month.
Are supplemental taxes deductable?
Yes, your supplemental property tax payments are deductible.