Mansion Global

Will My Taxes Go Up In My California Home if I Build a Guest House?

Yes, but it will be limited to how much the addition adds to your overall property value

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FingerMedium / Getty Images
FingerMedium / Getty Images

Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.

Q: I live in my home in Central California, and I have a lot of extra land on my property. If I build a guest house, will my taxes go up?

Yes, said Russell Stanaland, principal of Stanaland & Associates, a tax and estate planning firm in San Francisco. "Property taxes will increase if a guest house is constructed on a parcel that already contains a home," he said.

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The assessor, who learns of the new construction through building permits and certificates of occupancy that the city or county is required to provide, reassesses the value of the property, Mr. Stanaland said. But "the reassessment is limited to how much the improvement increased the property value," said Cameron Hess, a partner in the Northern California law firm of Wagner Kirkman Blaine Klomparens & Youmans.

"The whole property will not be reassessed," Mr. Stanaland elaborated "The base year assessed value will be increased only by the additional value that the guesthouse adds to the property."

You would want to be vigilant about that. Mr. Hess said that over-assessments occur when the assessor uses the total cost for new construction as the increased value rather than the value that the new construction adds to the property. They also happen when the assessor’s office determines an increase in land values by using the value of additional land in comparable property sales, with and without a second unit.

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Over-assessments also occur when the addition is not a legal second unit but is merely an addition. For example constructing a pool house or casita, would maintain the property, legally, as a single-family residence.

The best way to establish value, Mr. Stanaland advised, is to have a licensed real estate appraiser conduct an appraisal before the improvement and another after construction is completed.

An appraisal based on sale prices for comparable property is the most accurate measure of a property’s value, he said. But separate guest houses are not that common, making such comparable sales hard to find, Mr. Stanaland added. Or appraisers can establish the value of a property by estimating the income it would generate if it were converted to a rental.

Keep in mind that the added value could be less than the cost of construction. Say you add an addition that costs $50,000 but it only increases the property’s value by $15,000. In California, the maximum county property rate is 1% plus any bonds approved by voters. If only $15,000 is further assessed, your tax bill should increase by roughly $150, based on the value increase; it wouldn’t be $500 on the $50,000 cost of the addition, Mr. Hess said.

Email your questions to editors@mansionglobal.com. Check for answers weekly at www.mansionglobal.com.