Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I bought a small house in Silicon Valley, California. I'm planning to knock it down and build a house twice its size. Will my property taxes double?
A: They could, depending on the improvements.
"The taxes will likely double if you spend an amount equivalent to your original purchase of the land and improvements, plus the value of the demolished structure, on the new improvements," said Bradley R. Marsh, administrative shareholder at Greenberg Traurig law firm in San Francisco.
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In other words, say you buy a property for $5 million, with the land assessed at $3.5 million and the home at $1.5 million. You knock down the home and build a new one for $6.5 million. Your property taxes likely will double, Mr. Marsh said.
"The total new property tax will be a combination of the old land value and the new improvement value," said John D. Teter, an attorney with eponymously named law offices in San Jose, California. "The value of the land isn’t changed by the construction," he said.
While you’re in the process of rebuilding, your assessment will be temporarily reduced. But you may have to let the assessor know about your demolition to get that reduction, Mr. Marsh said.
After the construction is completed, the property will be reappraised and the fair market value of the improvements (the newly constructed home) will be determined by the county appraiser based on fair market value, Mr. Teter said.
The new construction is valued using either a cost approach or a modified version of the comparable sales approach, Mr. Marsh said.
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Under the cost approach, the assessor will generally review your actual costs to see if they are typical of the cost it would be to make those improvements.
Under the modified comparable sales approach, an appraisal is conducted for the market value of land in the area, and another is conducted for the market value of the combined land and improvement value of homes similar to the one you built, Mr. Marsh said. The market value of the land will be subtracted from comparable property sales to determine the market value of your improvements.
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