Bird Streets Blog

Mills Act

The Mills Act is a complicated program. I recommend hiring a Mills Act Preparer to prepare your application. Consult with a Mills Act Preparer about whether your home qualifies for the program, and how much it costs to have your Mills Act prepared. I know of some people who have done their own application- though I think that most will not have the inclination to research up on the process and DIY, when hiring a Preparer is quite affordable, in comparison with the reduced taxes from even you very first year under the Mills Act.

The Mills Act program was created by the State of California to preserve Historical Properties. The Mills Act provides property tax reductions by as much as 60% or, in some cases more! (I have seen a 90% annual tax savings once). The Act is named for the author of the legislation — historian, statesman, and writer Jim Mills. To qualify for the Act your property may be either:

1)    an existing City of Los Angeles Historic-Cultural Monument

2)    or A Contributing Structure in a Historic Preservation Overlay Zone (HPOZ)

The city of Los Angeles has 24 HPOZ with many more under consideration. Properties within an HPOZ are divided into contributing and noncontributing structures. The average percentage of dwellings within an HPOZ that is considered contributing is 65.8%. The percentage range of contributing dwellings within individual HPOZs can vary from a high of 98.6% in the South Carthay HPOZ to a low of 48.5% in the HighlandPark HPOZ.

If you live in an HPOZ, there is a great chance you qualify automatically for the Act by being a contributing Structure, so long as your assessed value is below $1,500,000 for Single Family Residential and $3,000,000 for multifamily.

It is important to hurry and complete your contract if you are considering to apply for the program because the city of Los Angeles is capping the amount of property tax revenue it will lose from Mills Act contracts at $1,000,000. I can tell you that we are somewhere near $750,000 at the moment, and at the current rate of applications, Los Angeles will reach its Cap- so don’t wait, if you don’t get your application finished in the next two years, the opportunity to participate in this program may be gone.

In LA, if your Single-Family dwellings has an assessed value above $1,500,000, or if your Multi-Family/Commercial/Industrial Building is above $3,000,000- then you will need to apply for an exemption with the Cultural Heritage Commission.

Your Mills Act preparer can handle filing your exemption form along with your application. When it gets into the details of the exemption process I must admit I am a bit lacking, since last year there were some changes introduced into the process. If your property is above the $1.5M threshold send me an email atjamesc2@gmail.com and I’ll put you in touch with my Mills Act preparer who will be able to explain the entire exemption process to you in detail.

Mills Act contracts are 10 year rolling contracts, meaning a contract automatically renews each year on its anniversary date and a new 10 year agreement becomes effective. This means you have to give 10 years notice to opt out of the Mills Act. You do this by giving notice of non-renewal.  Canceling and going through the process of non renewal are different. Note: The cost of canceling the contract is immense- 12.5% of the assessed value of the property, you should avoid canceling your contract.

Mills Act Contracts are selling points for homes. Mills Act contracts transfer with the property to the new owner when the property is sold. A property that has low property tax because it has a Mills Act contract makes it more attractive to buyers.

The responsibilities you have as an owner of a Property with a contract are that you agree to restore, maintain, and protect the property in accordance with specific historic preservation standards and conditions identified in the contract. Periodic inspections by City and County officials ensure proper maintenance of the property. The city conducts a drive by inspection once a year- unless the city has reason to believe you are in violation of the contract, in which case the city may conduct a full inspection. The City may impose penalties for breach of contract or failure to protect the historic property. The contract is transferred to new owners if the property is sold, and is binding to all successive owners.

The contract changes your assessed value from a comparable sales method of valuation to an income based method of valuation- which leads to the large tax savings.

Hypothetical Scenario:

Single Family Residence

Current assessed  valuation = $ 1,400,000

Current taxes = $ 17,500

($ 1,400,000 x 0.0125)

Recalculation Using Mills Act

Assessment Method:

Gross income = $ 74,400

($ 6,200 X 12 mo.)

Less expenses = $ 8,000

(insurance, repairs, utilities)

Net income = $ 64,400

Capitalization rate = 13.66%

Interest component at 6.75%

Historic property risk component at 4%

Amortization component at 1.67%

Property tax component at 1.24%

Total 13.66%

New valuation = $486,090

($64,400)

(0.1366)

New taxes = $ 6,076

($ 486,090 x 0.0125)

TOTAL SAVINGS OF $ 11,423 annually or 66%

Mills Act Application Link

http://www.preservation.lacity.org/node/465

http://www.preservation.lacity.org/mills-act

http://www.boe.ca.gov/proptaxes/faqs/faqs_mills_act.htm

 

 

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Proposition 8: Decline in Value Reassessment

When property values decline the state of California allows homeowners to adjust their assessed value downwards if it is higher than the market price. This is made possible by California’s constitutional amendment passed in 1978, known as Proposition 8.

Lowering your property’s assessed value means paying less property tax.

Everyone wants to pay less taxes- so…. how do you take advantage of Prop 8?

You need to fill out a Decline-in-Value Reassessment:

http://assessor.lacounty.gov/extranet/guides/prop8.aspx

Below is a link to the “2012 Decline-in-Value Review Application” which is the form you will need  to fill out to do a RE Prop 8:

California Decline in Value Reassessment

Make sure you submit the form before this year’s deadline of November 3oth 2012. Applications may be submitted without two comparable sales to support your opinion of value. If you send in an application without two comparable sales the assessor will look up the comparable sales for you. The comparable sales must have occurred between January 1 and March 31st of 2012. I would strongly recommend you provide 2 comparable sales with your application, because this will allow you to select comparable sales that will be to your advantage.

You can search for comparable sales yourself using the assessor’s database here:

http://maps.assessor.lacounty.gov/mapping/viewer.asp

Too difficult? Ask your local real estate agent or title rep to help you find them. If you would like my assistance preparing your application and finding the best 2 comp’s contact me.

Once your application is submitted an appraiser will review the information and make a decision. It is important to understand that filing a Prop 8 can never hurt you by making your taxes higher. Let me explain why:

*If the current market value for your home is greater than Base Value trended, no change in assessed value will be made.

Example
A property was purchased for $500,000. During a three-year period, the real estate market declined and recovered. The property owner filed for a decline-in-value reassessment. The following table shows the trended base value of the property, the market value of the property, and the assessed value of the property. Assuming a 2% Annual C.P.I.:

Base Value Trended Market Value Assessed Value
Year 1 $500,000 $500,000 $500,000
Year 2 $510,000 $480,000 $480,000
Year 3 $520,200 $510,000 $510,000
Year 4 $530,604 $550,000 $530,604

Because you can never exceed your base value trended, you only stand to lower your taxes by attempting to adjust your assessed value. In the example above, if you had not filed a prop 8 in year 2 you would have been taxed on an assessed value of $510,000 instead of $480,000, assuming a 1.25% property tax on the $30,000 difference in assessment, you save $375 in year 2.

You may file a Prop 8 every year (although in a rising market there is no benefit) and your base year trended values increases by an annual inflation factor of no more than 2% per year.

 

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