Property taxes are one of the largest ongoing costs of homeownership in California, but the state's tax framework also provides significant protections and opportunities that every Silicon Valley property owner should understand. Here is what you need to know.
Proposition 13: The Foundation of California Property Tax
Passed in 1978, Proposition 13 is the cornerstone of California's property tax system. It caps the assessed value of property at its purchase price and limits annual increases to no more than 2 percent, regardless of how much the market value appreciates. In Silicon Valley, where homes purchased twenty years ago for $500,000 may now be worth $3 million, Prop 13 creates enormous tax savings for long-term owners.
The base property tax rate is 1 percent of the assessed value. On top of this, local voter-approved bonds and special assessments add to the total. In San Mateo County, effective tax rates typically range from 1.1 to 1.3 percent of assessed value, depending on the city and any applicable Mello-Roos or special district taxes.
Proposition 19: Tax Base Transfers
Passed in 2020, Proposition 19 allows homeowners age 55 and older, disabled persons, and wildfire or disaster victims to transfer their Prop 13 tax base to a replacement property anywhere in California, up to three times. This is a game-changer for Peninsula homeowners looking to downsize. A couple who purchased their Atherton home in 1990 with a $300,000 assessed value can now buy a condo in San Mateo and keep their low tax base, potentially saving tens of thousands annually.
However, Prop 19 also changed the rules for inherited properties. Previously, children could inherit their parents' Prop 13 tax base regardless of how they used the property. Now, the exemption is limited to properties used as the child's primary residence, and the value difference above $1 million is reassessed. This has significant implications for estate planning on the Peninsula.
Tax Deductions for Homeowners
- Mortgage interest. Homeowners can deduct interest on up to $750,000 of mortgage debt on their federal tax return. For Silicon Valley buyers with larger mortgages, this cap limits the deduction but still provides meaningful savings.
- Property tax deduction. State and local taxes, including property taxes, are deductible up to $10,000 combined. In high-tax states like California, many homeowners hit this cap, but the deduction still offsets a significant portion of your tax bill.
- Capital gains exclusion. When you sell your primary residence, up to $250,000 in capital gains ($500,000 for married couples) is excluded from federal taxes. In Silicon Valley, where appreciation over a holding period often exceeds these thresholds, strategic timing and ownership planning become important.
Supplemental Tax Assessments
When a property changes hands in California, the county assessor issues a supplemental tax bill that reflects the difference between the old assessed value and the new purchase price. In San Mateo County, these supplemental bills can be substantial. A home previously assessed at $800,000 that sells for $2.5 million will generate a supplemental bill covering the $1.7 million increase, prorated for the remaining months in the fiscal year. Buyers should budget for this, as it arrives separately from the regular tax bill.
Working with a Tax Professional
Property tax planning in California is complex, and the stakes in Silicon Valley are high. I always recommend that my clients work with a CPA who understands California real estate tax law. If you need a referral, I am happy to connect you with trusted professionals in the area.