Property Tax Relief May Be Available to California Taxpayers Impacted by the COVID-19 Pandemic

Property owners in California that experienced a decline in the market value of their property due to COVID-19 may be entitled to two forms of property tax relief. Proposition 8 permits taxpayers to claim temporary reductions in property value. Property owners may also claim a reduction due to a misfortune or calamity. Andersen can help property owners determine whether they are eligible for relief and assist in preparing reassessment requests and property valuations.

Background on California Property Tax Law

California property tax is assessed based upon the property value as of January 1 each year. Real property values as of January 1, 2020 determine the property tax base for the fiscal year 2020-2021 that runs from July 1, 2020 through June 30, 2021. Proposition 13 limits the property tax assessment to the base year value plus 2% for each subsequent year. Such base year value is redetermined when a change in ownership occurs.

Proposition 8 Reduction for Temporary Decrease in Value

Proposition 8 provides for a temporary reduction in the property value due to temporary declines in market value, though it does not re-set the Proposition 13 base year value. The COVID-19 pandemic may cause certain properties to decrease in value meriting a Proposition 8 reduction. Each county sets the time period to make Proposition 8 reduction requests that would be taken into consideration when the county determined the assessed value. The time for making such requests may have passed. The assessors generally send property tax value notices in July. Taxpayers may protest the assessed value and claim a Proposition 8 reduction between July 2 and September 15.

A Proposition 8 reduction generally relates to the reduced values as of the January 1 assessment date. In addition to a reduction under Proposition 8, California law provides a separate reduction for misfortunes or calamities. This presents an additional option to achieve California property tax reductions as a result of the COVID-19 pandemic that occurred after January 1, 2020.

California Property Tax Disaster Relief

Cal. Rev. & Tax. Code Sec. 170 authorizes county assessors to enact ordinances that provide for any assessee of taxable property whose property was damaged or destroyed without his or her fault to apply for reassessment. The law also authorizes the assessor to initiate the reassessment of property where the assessor determines that within the preceding 12 months taxable property was damaged or destroyed. Eligible properties include 1) any property that was damaged or destroyed by the major misfortune or calamity that caused the Governor to proclaim the area or region to be in a state of disaster, 2) damaged or destroyed property due to a misfortune or calamity, and 3) a possessory interest in land owned by the state or federal government that has suffered a misfortune or calamity causing the permit or other right to enter upon the land to be suspended or restricted. All counties in California have enacted the ordinance allowed by state law.

Section 170 is Not Limited to Physical Damage in a Governor-Declared Disaster Area

The law requires damage or destruction to qualify for reassessment. In a governor-declared disaster area, “damage" is defined to include “a diminution in the value of property as a result of restricted access to the property where that restricted access was caused by the major misfortune or calamity.” Cal. Rev. & Tax. Code Sec. 170(a)(1). This implies that physical damage to the property may not be necessary to qualify for revaluation.

The California Court of Appeal directly addressed the physical damage requirement when the airlines sought property tax relief following the September 11, 2001 terrorist attacks in New York City and Washington. In Warren Slocum v. State Board of Equalization, 134 Cal. App. 4^th 969 (2005), the court states that the objective of Sec. 170 “is to afford financial relief to the owners of property physically damaged or destroyed by an unforeseeable occurrence beyond their control.” Further the court notes that Sec. 170(g) contemplates a reduction in value until the damaged property may be repaired, restored, or reconstruction, which may only occur as a result of physical damage. Nonetheless, the court recognizes the exception in subdivision (a)(1) whereby damage may result from restricted access following a governor-declared disaster. While the matter before the court did not fit within subdivision (a)(1), the court acknowledges that physical damage is not a requirement in all cases.

Non-physical damage may require something more than a temporary restriction. In a letter from Board of Equalization Senior Staff Counsel to the Venture County Assessor on May 25, 1995, the Board opined that erecting a fence for a month around otherwise habitable homes due to a mudslide that destroyed nearby homes did not constitute a diminution in value. In this matter, the residents were allowed access to their homes while the fence was erected, there was no physical damage to the homes, and the fencing was so temporary that the diminution was incapable of measurement. It is unclear whether the property owners presented appraisals or other evidence demonstrating the diminution of value.

To claim other than physical damage, the law requires a governor-declared disaster. Governor Newsom declared a State of Emergency covering the entire state on March 4, 2020 and asked President Trump to declare the State of California a major disaster. The President honored the request and issued a Major Disaster Declaration on March 22, 2020 pronouncing the State of California a disaster area beginning January 20, 2020.

Application of Disaster Relief to COVID-19

The unprecedented shuttering of properties due to COVID-19 may cause decreases in the value of such properties. Arenas, concert halls, restaurants, bars, and a host of other income-producing realty have suffered a reduction in business receipts for an unforeseeable timeframe. Certain properties may have been valued significantly higher on January 1, 2020 than the period following the President’s state disaster declaration.

The circumstances surrounding COVID-19 appear to fall within the requirements of Sec. 170. Nevertheless, the Board of Equalization specifically declined by 3-2 vote to provide guidance on Sec. 170’s application to COVID-19. The interpretation of Sec. 170 is left in the hands of each assessor leaving certain issues unresolved. First, the law provides no definition of a “misfortune or calamity.” The law appears to contemplate natural disasters outside of a property owner’s control. For example, the San Francisco Disaster Relief Application Form RP 67 includes check boxes for damages cause by earthquake, flood, fire, landslide, and “other.” Here, it would appear the “other” category should be applicable – it is reasonable to consider the COVID-19 a misfortune or calamity punctuated by the declaration of a national disaster and first-ever statewide shelter in place order.

Second, the Governor did not himself officially declare a disaster. Unlike the Warren Slocum situation where the tragic event was localized and not in California, the COVID-19 disaster covers the entire state. Further, it was in part at the Governor’s request that a disaster be declared at the national level. In his letter to the President, the Governor describes the situation as a “major disaster.” Notwithstanding an official declaration, the Governor proclaimed California in a state of disaster.

Finally, the diminution in value carries a measure of uncertainty. For income-producing properties it is not clear how quickly people will return to certain venues. The overall impact to the economy may cause reduced revenues from residential and commercial rental properties lasting many years. Property owners should evaluate the current market value of their properties with a certified appraiser.

Applying for Disaster Relief

The application for reassessment may be filed within the time specified in the ordinance or within 12 months of the misfortune or calamity, whichever is later, by delivering to the assessor a written application requesting reassessment showing the condition and value, if any, of the property immediately after the damage or destruction, and the dollar amount of the damage. The assessor would then appraise the property to determine whether the sum of the full cash values of the land, improvements and personal property before the damage or destruction exceeds the sum of the values after the damage by $10,000 or more. If so, the assessor would separately determine the percentage reductions in the value due to the damage or destruction.

If the calamity or misfortune occurs between January 1 and June 30, any reduction would apply to the following fiscal year. If the property is restored during the next fiscal year the reduction in value would be prorated to account for the period in which the value declined.

Unlike physical damage that may be repaired, the economic damage suffered due to COVID-19 may be unknown at the time of making an application. Property owners should work with their appraisers to determine the diminution in value based upon the unique aspects of each property. In addition to relief under Proposition 8, impacted property owners should consider applying for a reduction in value due to the COVID-19 pandemic.

The Takeaway

There are two forms of property tax relief that may be available to property owners in California in response to declines in market value as a result of the COVID-19 pandemic. Property owners may be entitled to a temporary reduction in value under Proposition 8. In addition, county property tax assessors have the statutory authority to provide property tax relief to property owners in the state that experience misfortunes or calamities. Although the statute providing such relief appears to contemplate property damage as a result of a governor-declared natural disaster, the circumstances surrounding the COVID-19 pandemic warrant the statute’s application.

Andersen can help property owners determine whether they are eligible for relief and assist in preparing reassessment requests and related activities.

On the date of this publication SB1431 is pending which would specifically extend Sec. 170 relief to residential property owners impacted by renter protection measures.