Does Refinancing Affect Property Taxes in California?

Refinancing a home offers financial advantages, from securing a lower interest rate to accessing equity. Many California homeowners wonder how this action interacts with the state’s unique property tax system. Understanding this relationship is important for property owners.

California Property Tax Basics

California’s property tax system operates under Proposition 13, enacted in 1978. This proposition established a “base year value” for real property, generally set at its purchase price or fair market value as of 1975. Once established, this value can only increase by a maximum of 2% annually, or by the California Consumer Price Index, whichever is less. This limitation provides predictability and stability for property owners regarding their annual tax bills.

A property’s assessed value, and thus its property taxes, can be reassessed to current market value only under specific circumstances. The primary triggers for reassessment are a “change in ownership” or the completion of “new construction.” Unless one of these events occurs, the annual increase in a property’s assessed value is capped at 2%. This framework helps homeowners avoid drastic tax increases due to market fluctuations.

Refinancing and Property Tax Reassessment

A common concern among homeowners is whether refinancing their mortgage will trigger a property tax reassessment. In most cases, a standard refinance does not lead to a property tax reassessment in California. This holds true for both rate-and-term and cash-out refinances, provided the property’s ownership structure remains unchanged.

Refinancing involves a change to the loan agreement, not a transfer of the property’s title or ownership. The county assessor’s office considers a reassessment only when there is a formal “change in ownership” recorded. As long as the names on the property’s title remain the same, refinancing has no direct impact on the property’s assessed value for tax purposes.

Exceptions to the Rule

While a typical refinance does not trigger a property tax reassessment, certain situations where it coincides with other actions might lead to one. Reassessment can occur if the refinancing process involves a “change in ownership.” For instance, adding or removing an owner from the property’s title during the refinance, such as adding a co-signer or transferring ownership between individuals, can be considered a change in ownership. Transferring a property into or out of a trust where beneficial ownership changes, or transfers related to a divorce settlement, may also trigger reassessment.

Another scenario where a refinance might indirectly precede a reassessment involves new construction or major remodels. If a homeowner uses funds from a cash-out refinance to finance significant improvements, such as adding a room or building an accessory dwelling unit, the value added by this “new construction” can be reassessed. The reassessment applies only to the value of the new construction, not the entire property. The reassessment is triggered by the completion of the new construction, not by the refinance itself.