Calculation of the amount of property taxes after sale in California is one of the most misunderstood aspects of a basic investment analysis. In order to calculate a property's annual net operating income, accurate expense figures are required; one of the larger expense items is typically the property taxes. Many investors (and even many agents) are still laboring under the misapprehension that a applying single, set percentage of the assessed value of the building will give a correct answer for every property in a county (or even throughout the state); this is not so!

While California law limits the actual amount of TAXES to one percent of the assessed value of a property, there are typically a number of additional items charged as part of the tax bill, known as BONDED INDEBTEDNESS*. The total tax bill of a piece of California real estate will always be one percent of the assessed value, plus the amount of bonded indebtedness applicable to that particular property*. Once we realize that the annual tax bill consists of these two components, one fixed (bonded indebtedness) and one variable (taxes equaling one percent of the assessed value), it becomes relatively easy to figure property taxes for any given property valuation.

Let's walk through the process:

• The first step is to find the current assessed value and current annual taxes for the property in question. This information is available through the county assessor for the county where the property is located; most real estate agents can also access the same information through the local Multiple Listing Service.
  

• The second step is to multiply the current assessed value by one percent. This is the portion of the current tax bill which actually consists of property TAXES.
  

• With the amount of current property TAXES known, we subtract this figure from the total annual tax bill for the property. The remaining amount is the total BONDED INDEBTEDNESS.
  

• Remember, bonded indebtedness does not change with the property's valuation. Therefore, to figure new property taxes for any given valuation, simply multiply the new valuation (usually the purchase price if a sale is contemplated) times one percent, then add the amount of bonded indebtedness to find the new total property tax bill for the subject property. That's it!

Remember, the valuation is set by the county assessor's office; this may generally be increased by a maximum of 2% per year*. The main exception is that when a property is sold, a new assessment is performed according to the true market value. If the sale has been at a reasonable market price, the new assessment is usually based on the sale price. However, it may take quite a while for this to be done, so don't be surprised if the assessed value takes a long time to "catch up with the sale." Also, remember that bonded indebtedness can change from time to time.

No method will ever be 100% exact, but this will certainly get you much, much closer than trying to apply a single, flat percentage to every building - and it's not that tough to do it RIGHT!

* Source Materials: California Constitution, Article 13A, Sections 1(a), 1(b), 2(a), 2(b), 4.