Understanding Prop 13 and how it affects your apartment sale is crucial for Los Angeles property owners. This guide explains how Proposition 13 impacts property taxes when you sell and what buyers need to know.

Understanding Proposition 13

If you’ve owned your Los Angeles apartment building for any length of time, understanding Prop 13 and your apartment sale is crucial because you’re benefiting from one of the most significant pieces of legislation in California history: Proposition 13.

Passed by voters in 1978, Prop 13 limits how much your property taxes can increase each year—but that protection ends when you sell. Understanding this dynamic is critical for both sellers and buyers in the LA multifamily market.

How Prop 13 Protects Current Owners

The 1-2% Annual Cap

Under Prop 13, your property’s assessed value can only increase by a maximum of 2% per year, regardless of how much the market value has risen. This means:

• A building purchased in 2000 for $1,000,000 would have a current assessed value of roughly $1,600,000
• That same building might have a market value of $4,000,000 or more
• The owner pays taxes on $1.6M, not $4M

The Tax Rate

Property taxes in LA are approximately 1.25% of assessed value (1% base rate plus local additions). So:

• Taxes on $1.6M assessed: ~$20,000/year
• Taxes on $4M assessed: ~$50,000/year
• Annual savings: $30,000

This is why long-term owners often have dramatically lower property taxes than recent buyers of comparable buildings.

What Happens When You Sell

Reassessment to Market Value

When ownership changes, the property is reassessed to its current market value (the sale price). This means:

• The buyer’s property tax bill will be based on what they paid
• A $4,000,000 purchase = ~$50,000/year in property taxes
• This is a permanent increase that affects the property’s NOI and value

Impact on Buyers

Sophisticated buyers always underwrite the post-sale property tax, not your current tax bill. This means:

• Your low property taxes don’t directly increase what buyers will pay
• Buyers calculate NOI using the reassessed tax amount
• The “Prop 13 benefit” stays with you—it doesn’t transfer to the buyer

Example: How This Affects a Sale

Your Building:

• Gross Income: $300,000
• Operating Expenses (with your $15,000 property tax): $105,000
• Your NOI: $195,000

Buyer’s Perspective:

• Gross Income: $300,000
• Operating Expenses (with $50,000 reassessed tax): $140,000
• Buyer’s NOI: $160,000

At a 5% cap rate:

• Value based on your NOI: $3,900,000
• Value based on buyer’s NOI: $3,200,000

The $35,000 difference in property taxes translates to $700,000 in value. This is why buyers always adjust for reassessment.

Prop 19 and Inherited Properties

Proposition 19, passed in 2020, changed the rules for inherited properties:

Before Prop 19

• Children could inherit the parent’s low tax basis on any property
• This applied to primary residences and investment properties
• No reassessment occurred upon inheritance

After Prop 19 (Current Rules)

• Primary residences: Can still inherit the tax basis, but only if the child uses it as their primary residence
• Investment properties: Now reassessed to market value upon inheritance
• This significantly impacts estate planning for apartment building owners

Planning Considerations

If you’re planning to pass your building to heirs:

• Consult with an estate planning attorney about current options
• Consider whether holding vs. selling makes sense given Prop 19
• Understand that your heirs may face a significant tax increase

Strategies for Sellers

1. Understand Your True Position

Know the gap between your assessed value and likely sale price. This helps you understand:

• How buyers will underwrite your property
• Why offers may seem lower than you expected
• The real economics of your building vs. recently sold comps

2. Focus on What You Can Control

Since buyers will adjust for reassessment anyway, focus on:

• Maximizing rent income
• Controlling other operating expenses
• Presenting clean financials
• Highlighting upside potential

3. Consider 1031 Exchange Implications

If you’re doing a 1031 exchange, remember:

• Your replacement property will also be reassessed
• You’re trading your low tax basis for a new, higher one
• Factor this into your replacement property analysis

Why This Matters for Pricing

When you see comparable sales, remember that each buyer paid taxes based on their purchase price. A building that sold for $3M in 2015 has lower taxes than one that sold for $4M in 2023, even if they’re identical properties.

This is why experienced brokers and appraisers always normalize for property taxes when comparing buildings.

Quick FAQs

Q: Will my low property taxes make my building worth more?
A: Unfortunately, no. Buyers underwrite based on what their taxes will be after reassessment, not your current taxes.

Q: Can I transfer my low tax basis to a replacement property in a 1031?
A: No. The replacement property will be assessed at its purchase price. The 1031 exchange defers capital gains taxes, not property taxes.

Q: What if I add my child to the title?
A: This triggers a partial reassessment and may have gift tax implications. Consult with a tax attorney before making any ownership changes.

Have questions about how property taxes affect your building’s value? Request a valuation and let’s discuss your specific situation.

Prop 13 implications for your apartment sale can significantly affect both your proceeds and buyer interest. Let’s discuss how to position your property in light of these tax considerations.