In choosing between a significant remodel (think leaving a few walls up) and new construction, many choose a significant remodel because they are going to save a significant amount on property taxes. Having gone through a significant remodel and two new constructions myself, I found out at completion that even if you tear the house down to the studs and replace everything after that, the county will reassess the house as “substantially equivalent to new”. In fact, here is the guidance from Santa Clara County’s Assessor’s Office:
“If a house is stripped and taken down to the studs, and the restoration is such that the house has been converted to a state comparable to a new house, the value added by such a conversion would be re-assessable as new construction. The Assessor will look at the project and determine whether structural components such as roof structure, exterior walls, floor structure, foundations, substantial portions of the plumbing, electrical and/or HVAC (heating, ventilating or air conditioner) systems are being replaced.”
Thus, if you are doing a typical Bay Area remodel, they will consider the entire existing footprint as new construction and possibly give some credit for the foundation, subfloor, and few walls you left behind. New construction (and any portion of the remodeled house that is actually new) is assessed by:
“In estimating new construction, only the value of the improvement being added is considered. That is, if a new building is constructed on vacant land, the land will retain its existing indexed, base year assessed value. If an addition to a structure changes its size, for example, increasing the size of a single-family residence from 1,200 square feet to 2,000 square feet, only the market value of the additional 800 square feet is added to the assessed value. A new base year value is determined for the addition only. The indexed base year assessed value of the land and existing structure(s) remain unchanged.”
This means they are reassessing your remodeled house as new construction with some small credits. Now, how do they value that new construction?
“When the Sales Comparison Approach is employed, an appraisal of the land and the improvements is done as of the date of completion to determine the value of the new construction.
The Cost Approach is often employed by the Assessor to appraise new construction. It is important to note that proper application of the cost approach considers all the costs incurred in the course of construction. These “Full Economic Costs” include labor and materials, permit fees and contractor’s overhead and profit. In addition, there are indirect costs such as developer’s administration expense, professional fees, construction financing, insurance, and entrepreneurial incentive or profit.”
From my experience, in order to determine the “Full Economic Costs” including “entrepreneurial incentive or profit”, the County starts with the Sales Comparison Approach to determine the fair market value and then deducts the value of the land. They then add back in the base year value of the land which should be the value of the land when you bought it plus 2% per year. You would think they would just add back the value of the land on your property tax assessment. Typically, when you bought a property, the County would split the purchase price into land and improvement by half (now they put more into the land) each because it normally doesn’t matter. When you do a significant remodel or new construction, it does matter. Just because your property tax assessment has a break out for land vs improvements, the County can change the value of the land if it believes that it was not accurately split. They did that to me, but I have heard anecdotally somewhere that if the land has been owned for more than 2 years, they can’t reassess the land but I can’t find that in writing anywhere. For anyone that believes that they are going to get a much lower assessment on a “remodel” or a new construction than fair market value, think again. The Bay Area counties are fairly aggressive. For those who think they can build inexpensively and get a low property tax value, the County really doesn’t care how much you spent.