Did you leave one wall standing?
I was recently asked this question so many times, especially in response to the above image, that I had to respond and address this myth. Just to clarify, the above image shows the chimney still standing on the Skyline Drive Project during demolition. In demolition, different materials are segregated to aid in recycling. The masonry/concrete materials were removed last.
There are lots of myths in residential design and construction. One of the strongest, most entrenched, is the "leave one wall standing" myth. The premise of this myth is that if one wall is left standing, the project can be classified as a remodel, as opposed to new construction, and it will result in lower property taxes. Unfortunately, this is not true.
Property taxes are determined or calculated based on the assessed value of the land and the structure(s) on the land. If you make improvements to the structure (or land), the value of the property will increase. And the tax man wants to get their fair (debatable) share of the increased value. The State will reassess the improvements and raise your taxes accordingly.
The assessment is based on what the State defines as new or substantially new construction. In the simplest of terms, if one wall is left standing and 99% of the project is to be rebuilt, then, in this example, 99% of the project will be "new".
There are some benefits to remodel versus new construction. These benefits are associated with building codes and zoning ordinances that may be in place where you are building. These issues should be fully explored and understood before deciding to demolish a structure.
The following excerpt comes from the California State Board of Equalization website that explains very specifically the difference between remodeling and new construction. It also explains the impact each has on property taxes.
1. What is new construction?
Under California property tax law, "new construction" is defined in four general categories:
· Any substantial addition to land or improvements, including fixtures.
· Any physical alteration of any improvement, or a portion thereof, to a "like-new" condition, or to extend its economic life, or to change the way in which the improvement, or portion thereof, is used.
· Any substantial physical alteration of land which constitutes a major rehabilitation of the land or changes the manner in which it is used.
· Any substantial physical rehabilitation, renovation or modernization of any fixture that converts it to the substantial equivalent of a new fixture or any substitution of a new fixture.
Additionally, removing improvements or fixtures may also be considered new construction. Further clarification about what constitutes assessable new construction may be found in Letters To Assessors 78/188, 79/204, and 80/77.
2. Can you give me some examples of what new construction is, or is not, under each of the categories of "physically altering land, improvement, or fixture"?
Alterations in land
New construction: adding land fill; development of rural land into residential subdivision or other extensive site preparation prior to building; land leveling; terracing of a hillside; clearing of a brush-covered parcel; irrigation ditches and roads; installing curbs, gutters, and underground storm drains and sewer lines.
Not considered new construction: releveling of existing row crop land; removing orchard trees for replanting; rebuilding of levees or ditches; minor site preparation prior to building.
Alterations in improvements
New construction: a residence converted to a retail store by physically altering walls, installing counters, etc.; conversion of a garage into a living area; complete renovation of an older structure or portion thereof to make it the substantial equivalent of a new building; conversion of a single-family residence to a residence of two or more units; conversion of a portion of a warehouse to office space; conversion of an existing room to a bathroom.
Not considered new construction: maintenance and repairs; replacement of existing kitchen or bathroom cabinets; replacement of air conditioner unit; replacement of roof.
Alterations in fixtures
New construction: a wine bottling line that previously corked and labeled 500 bottles per hour that is updated with new parts so that it now generates 800 bottles per hour. (Fixtures, for purposes of new construction, is defined as an improvement whose use or purpose directly applies to, or augments the process or function of, a trade, industry, or profession; the term fixture is limited to a business fixture and does not encompass household fixtures).
Not considered new construction: any cosmetic refacing that does not raise the quality class or extends the economic life of the fixture or materially increases the usefulness of the structure; repairs and maintenance to a fixture, such as replacing belts, cylinders or rollers on a printing press, or the water pump on a wind machine.
3. Are there any exclusions related to new construction assessments?
Yes. The following is a list of exclusions related to new construction reassessments:
· The construction, installation, or modification of an existing dwelling eligible for the homeowners' exemption where the activity is intended to make the structure more accessible to, or more usably by, a physically disabled person who is a permanent resident of the dwelling (section 74.3).
· The timely reconstruction of property that has been damaged or destroyed by misfortune or calamity where the property after reconstruction is substantially equivalent to the property prior to the damage or destruction (see question 10 of FAQ - Disaster Relief). However, to the extent that the reconstruction exceeds the substantial equivalence of the property prior to the damage or destruction (for example, adding a new bathroom), such construction will be assessed and added to the base year value at its full market value (section 70(c)).
· Construction on existing structures that are built of unreinforced masonry bearing wall construction to comply with local seismic safety ordinances (section 70(d)); seismic retrofitting improvements or other improvements to existing buildings or structures that utilize earthquake hazard mitigation technologies (section 74.5).
· The construction or addition of any active solar energy system installed to provide for the collection, storage, or distribution of solar energy for water heating, space conditioning, heating, production of electricity, or solar mechanical energy. Active solar energy system does not include solar swimming pool heaters or hot tub heaters (section 73).
· The construction or installation of any fire sprinkler system, other fire extinguishing system, fire detection system, or fire-related egress improvement in an existing building (section 74).
· The improvement, upgrade, or replacement of a tank to comply with federal, state, or local regulations on underground storage tanks (section 70(e)).
· The repair or replacement of a substantially damaged or destroyed structure on qualified contaminated real property where the remediation of the environmental problems required the destruction of, or resulted in the damage to, the structure (section 74.7).
4. What happens to the assessed value of my property when there is new construction?
Reassessment of a property is required any time new construction occurs (section 71). Thus, new construction, when not considered normal maintenance or repair, is assessable if it adds value to the property. The market value (not necessarily the cost) of the addition or other "new construction" is determined by the assessor and added to the existing property assessment. The value of the existing property is not affected.
New construction that adds value to the property represents the incremental value added to the existing property and will generate a supplemental assessment. The existing property, however, is not reappraised; its assessed value will not change except for the annual inflation adjustment of up to two percent.
5. What if I don't agree with the assessed value placed on the new construction?
As with a change in ownership or any newly assessed values, you have the right to appeal the value if you feel that the assessed value exceeds the market value of your new construction.
You may request an informal review of the assessment from the assessor's office. If the review does not result in a satisfactory conclusion, you may pursue anassessment appeal.
The assessment appeal process is available for disagreements regarding the enrolled value of the property. An independent assessment appeals board from your county hears all appeals and renders a decision. Information concerning the assessment appeals process and deadlines in which an appeal must be filed are included with the value notification(s) sent by the county assessor to the property owner.
6. I just completed a new master bedroom and bath addition to my home. How did the county assessor become aware of my new construction?
The county assessor becomes aware of such new construction because copies of all building permits issued by a county or city are required to be sent to the county assessor. However, not every building permit for new construction results in reassessment. In general, the county assessor's office processes thousands of building permits annually, yet perhaps less than half result in additional assessments.
Additionally, the county assessor, by law, is required to value all new construction, even if a building permit has not been issued. Discovery of new construction occurs in a variety of ways, such as that reported at the time a property transfers ownership, information volunteered by the public, or personal observation by county assessor's staff performing routine field checks.
7. How would my property taxes change if I enlarge the square footage of my family room and kitchen, add a patio, and replace my shake roof with a tile roof?
Any addition to your existing home, including outdoor additions, such as patio covers, pools, spas, decks, sunrooms and flatwork, would cause a reassessment of the portion of the property that was newly constructed. The assessed value of any existing portion of your property, whether land or improvements, would not be affected by the addition, and thus, would not be reappraised. The increased tax amount based upon the new construction will be determined by the estimated market value of the new construction and will not necessarily be the cost of the new construction. Replacing your shake roof with a tile roof, however, would not be considered new construction since this type of improvement is considered routine maintenance; thus, any increase in value due to this factor would not be reassessable.
8. How would my property taxes change if I tore down my existing home and built a new house in its place? Would it make a difference if I tore everything down and left one wall up?
If you built a new house, the entire structure will be considered new construction and will be fully reassessed at current market value. The value added by the new house, less the assessed value of the home torn down, would determine your additional tax burden. To leave one wall standing would make no difference for property tax purposes–essentially, the improvements would be considered all new construction. Only the assessed value of the land would not change.
Depending upon the county in which you live, there may be other laws, however, that require you to leave part of the structure standing for various reasons (i.e. a wall or other defining improvement for zoning or permitting purposes). Thus, it is advisable to review other laws or ordinances in your county that may affect you.
9. Does rehabilitation work on my home count as new construction?
Because rehabilitation work is more structural in nature, it usually is assessable. Reassessable rehabilitation work may involve substantial changes to the plumbing system, electrical system, framing or foundation, and can extend the usable life of a building. The county assessor is responsible for determining, on a case-by-case basis, whether such work involves substantial changes constituting a reassessable event.
10. If a kitchen is extensively altered by adding built-ins, extending countertops, adding new cabinets and removing or adding portions of walls, is this considered new construction?
If, in the opinion of the county assessor, the kitchen is now the equivalent of a new kitchen, it can be considered newly constructed. If, however, the work is considered remodeling or maintenance, it would not qualify as new construction. The decision whether the work is considered new construction or not is determined by the county assessor on a case-by-case basis.
11. What are some other alterations that may be considered new construction?
· Additions to existing improvements;
· Converting an unfinished basement or attic into a living area;
· Adding a garage, sunroom, enclosed patio, or elevator;
· Adding a swimming pool, spa, or sauna; or a patio or deck;
· Increasing the square footage of a home;
· Demolition of an existing structure;
· Bathroom – the addition of one, or structural changes, upgrading of plumbing and/or electrical systems, changing the floor plan, increasing the size, replacing cabinets, countertops, flooring or fixtures with upgraded material and finishes;
· Kitchen – structural changes, upgrading of plumbing and/or electrical systems, changing the floor plan, increasing the size, replacing cabinets, countertops, flooring or built-in appliances with upgraded material and finishes;
· Taking an entire house or a portion of the house down to studs;
· A change in use (for example, converting from industrial to residential use or converting storage space to habitable space);
· Upgrading the capacity of plumbing or electrical systems (for example, increasing electrical capacity from 110 volts to 220 volts).
12. I just installed solar heating panels on my roof to heat my swimming pool water. Is this excluded from new construction assessment because it is an active solar energy system?
No. Section 73(b)(2) specifically states that "active solar energy system" does not include solar swimming pool heaters or hot tub heaters. An active solar energy system must be a system that uses solar devices to provide for the collection, storage, or distribution of solar energy (for example, produces electricity or heats a hot water heater).
13. How do you value a new building that is under construction during a period encompassing several lien dates?
New construction in progress on the lien date shall be appraised at its full cash value on such date and each lien date thereafter until the date of completion, at which time the entire portion of property which is newly constructed shall be reappraised at its full cash value. Annual inflation adjustment on the improvement value should not begin until the lien date following the lien date upon which the complete improvement value is enrolled. Assessments of unfinished new construction are not base year values; rather they are temporary assessments until the construction is completed.
14. When is new construction considered complete?
The date of completion is the date the property or portion thereof is available for use. If a project is to be constructed in distinct stages, with portions being completed and available for use before the other portions are constructed, base year values can be separately established for the completed portions without regard to the incomplete status of the total project. If, however, the project is to be constructed as a single facility and the entire improvement will become available for occupancy within a reasonably short period of time, the total project will be handled as construction in progress until all portions of the improvement is available for occupancy. The county assessor uses his or her judgment in determining whether portions of a project can be considered complete for purposes of base year valuation.
"Available for use" means that the property, or a portion thereof, has been inspected and approved for occupancy by the appropriate government official, or, in the absence of such approval, when the prime contractor has fulfilled all of the contractual obligations. If neither a government inspection nor a prime contractor is involved, then the newly constructed property is considered available for use when outward appearances clearly indicate that it is immediately useable for the purposes intended. Fixtures are available for use when all testing necessary for proper operation or safety is completed. However, new construction is not available for use if, on the date it is otherwise available for use, it cannot be functionally used or occupied.
15. I took out a building permit to add on a family room downstairs and a complete second story, which will consist of two bedrooms and two baths. I will be doing most of the work myself and will finish the family room first, but will slowly work on the upstairs as time permits. Will the new construction value be added to my assessed value after everything is done?
Typically, new construction value is added after it is available for use by the owner. Since there may be two distinct stages of your new construction, the family room may be given a base year value before the upstairs is complete if it appears you will not complete the work in a reasonable time frame. It is not proper to continue valuing all of your new construction year after year as construction in progress.
16. What are some other alterations that are not considered new construction?
· Central heating and cooling system, or replacement of wall or floor heating with baseboard heaters;
· Galvanized waterlines with copper or plastic waterlines;
· Old bathroom and kitchen fixtures with modern fixtures;
· Wood-framed windows with energy efficient metal or aluminum frames;
· Dry rot or termite damaged joists, studs, rafters, stairway, and/or exterior siding;
· Molding strips, plaster, drywall, and wall paneling with similar substitute materials;
· Wall or floor coverings;
· Kitchen or bathroom cabinets, countertops, flooring or fixtures, built-in appliances with items of similar quality;
· An electrical fuse box with circuit breakers; or;
· Doors, windows, stairs, fences or decks or repairing thereof.
17. Is the renovation of a commercial office building to suit a new tenant by moving partitions, painting, re-carpeting and relocating electrical and telephone jacks or lines considered alterations to improvements requiring new construction reassessments?
No. The renovation as described would not meet the requirements for new construction because the usefulness of the structure has not changed. While the alterations may suit the particular tenant, it is also very likely that these changes would attract another equally desirable tenant at a comparable rent with no outlay for any further expensive remodeling.
18. I did some structural work to both the inside and outside of my home to accommodate wheelchair accessibility for my mother, who lives with us. Will this new construction be assessed? Does it matter that my mother does not own the home?
If your mother is severely and permanently disabled, the new construction may be excluded; however, you must file the appropriate claim form, BOE-63, Claim for Disabled Accessibility Construction Exclusion from Assessment (Revenue and Taxation Code section 74.3). Some county assessors provide the form via a link from their website.
Disabled persons do not need to own the home for the new construction to qualify for exclusion; however, they do need to occupy the property as their permanent place of residence, and the property must qualify for the homeowners' exemption.
19. Legally, I must have a bathroom that is accessible to the physically disabled in my small restaurant. If I were to renovate the two single bathrooms that I currently have, they would be unusable for a substantial period of time. Thus, it would be easier to add a new bathroom that would accommodate the disabled. Would the addition of a new bathroom qualify for the disabled persons’ accessibility exclusion?
No. Unlike the homeowner's disabled person's accessibility exclusion of section 74.3, the exclusion provided in section 74.6 does not apply to entirely new additions to an existing building or structure, even though the addition may duplicate existing facilities.
20. My husband has recently become wheelchair-bound. We own a home with one small bathroom and no family room. In addition to installing a ramp, we would like to add a usable bathroom for him and a family room since the living room is very small and it is difficult for him to get around in it. Would both of these additions be excluded from new construction assessment under the disabled persons’ accessibility exclusion?
The bathroom addition would clearly be within the disabled persons’ accessibility exclusion. Any new additions may duplicate existing facilities if it makes a homeowner's dwelling more accessible to the physically disabled by providing for the "full use" of the dwelling. Although the addition of a family room does not duplicate an existing room, if the existing living room has limited space that makes it difficult for the disabled person to get around, the addition of a family room would essentially be a duplicate living room necessary to make the dwelling more accessible, and, thus, could be excluded from new construction. It is within the judgment of the appraiser who is inspecting the additions or modifications, however, to determine whether the new construction was, in fact, made with the intent to make the dwelling more accessible to a disabled resident.
21. We were renting a home but now it is not adequate for my young daughter, who is in a wheelchair. We are now ready to buy or build a new home with wheelchair accessibility. Are there disabled persons’ exclusions available to us?
The disabled persons’ accessibility exclusion of section 74.3 is only available for new construction work on an existing dwelling to make it more accessible to a disabled person who is a permanent resident in the home. The exclusion does not apply to the purchase of a new home (even with wheelchair accessibility already in place) or the construction of an entirely new dwelling.
However, if you decide to build a new home and must construct portions of the house to make it more accessible for your disabled daughter (such as add wider doorways, enlarge bathroom facilities, install special railings or ramps), the added value of any of these features that were specially installed to adapt the home for use by your daughter would be excluded from new construction.
Similarly, if you purchase a new home and renovate portions of the house necessary to make the dwelling more accessible to your disabled daughter, such new additions would be excluded from reassessment. Of course, in either situation, the exclusion would apply only to the extent of that portion specially constructed for your disabled daughter’s accessibility.
22. I still have questions on new construction. Who can I call?
If you have further questions, you may find answers in Letters To Assessors (LTA) by searching under the "New Construction" topic in the Accumulative Index of Letters to Assessors at: http://www.boe.ca.gov/proptaxes/pdf/ltaindex.pdf. The index will direct you to a specific LTA on a subtopic; the LTA number is a link to that particular letter. You may also call the County-Assessed Properties Division at 1-916-274-3350.
23. How does this new construction exclusion for solar energy systems work?
Generally when something of value is physically added to real property, the addition is assessed at current market value and this value is added to the existing base year value of the real property. When an active solar energy system is installed, it is not assessed, meaning that the existing assessment will not increase.
24. Recently I added an active solar energy system to a home that I have owned for 10 years. Do I need to complete any form or notify the assessor that I have installed an active solar energy system to receive the exclusion?
No. There is no form or filing required to receive the exclusion. The assessor usually discovers the installation of the active solar energy system by means of the building permit that was taken out. If you think you've been assessed for the installation of an active solar energy system, you should contact your county assessor. You may find your assessor's contact information by clicking on the name of your county via the following link:www.boe.ca.gov/proptaxes/assessors.htm.
25. Last year I purchased a new home from a builder that included an active solar energy system. Now the developer has sent me a form called the "Initial Purchaser Claim for Solar Energy System New Construction Exclusion." What is the purpose of this form and where do I send it?
The completed form should be mailed to your county assessor. A list of county assessors and their addresses is posted on our website atwww.boe.ca.gov/proptaxes/assessors.htm. Under certain circumstances, as the initial purchaser of a new building, your new base year value may be reduced by the value of the active solar energy system, less any rebates or tax credits received. Your builder will be able to provide you with the value of the system and any rebates or tax credits that they received.
The following link also explains the relationship between new construction and property tax.