Proration of Property Taxes
Unlike sales taxes or documentary transfer taxes, which are usually calculated and payable on a one-time, single transaction basis, property taxes can be divided. This process of dividing the tax burden is known as proration. When property changes ownership by gift, purchase or foreclosure, the taxes are usually prorated by period of ownership. When a single assessor parcel is subject to shared ownership, such as between lessor and lessee, property taxes are often divided between the parties by land area and/or value category.
Example of Proration
Proration by period of ownership will occur, as an example, with the sale of a residence on February 23 of a given year. Because the regular property tax covers the fiscal year from July 1 of one year through June 30 of the next year, the seller and buyer normally prorate the taxes, with the seller paying the taxes from July 1 through February 22 and the buyer paying the taxes from February 23 through June 30. These prorations usually takes place in escrow at the time of closing. Proration also can occur with supplemental refunds. If the timing is right, our computer system automatically prorates the refund between the person who bought the property originally and the person to whom the property was sold.
In a lease situation the proration is not handled automatically and is determined by the terms of the lease. Here is an example where the proration is determined by acreage and value category: The owner of a 40-acre parcel leases 26 vacant acres, which are plantable, to a winery for vineyard purposes for a term of less than 35 years. The lease allows the winery to plant vines and install associated non-living improvements (NLI) such as trellis and irrigation systems. The lease calls for the winery (lessee) to pay their share of the property taxes.
At the request of either party and upon payment of a $75 annual fee, the Assessor's office will prepare a letter showing the proration of the taxable value between the 14 acres retained by the owner (lessor) plus her house and the 26 acres of vineyard land, NLI and vines leased by the winery. Since only one tax bill is created per parcel, it is up to the parties to work out the payment arrangements for that bill. In certain cases, the parcel can be "separated for assessment parcels (SFAP)" and separate bills sent to lessor and lessee. Separation for assessment purposes requires a legal description of the land being leased and the payment of a one-time mapping services fee but does not create new "legal parcels."
Personal Property Taxes Are Not Prorated
Property taxes on boats, airplanes and business equipment are not usually prorated at time of sale. The law requires the owner on January 1 to pay the taxes for the coming tax year, July 1 to June 30. So someone who sells a boat, aircraft or business between January 1 and June 30 should collect the next fiscal year taxes as part of the sale. If a bulk transfer of a business is done through escrow before that year's tax bill is issued, the Assessor's office supplies values to the County Tax Collector's staff for the purpose of estimating taxes for the coming year. Funds for the future bill are deposited with the Tax Collector out of escrow. The parties still have to agree on how or whether to prorate the amount deposited depending on when the transfer takes place.
Possessory interest tax bills which cover private use of non-taxable property such as hangars at the Napa County Airport and employee housing at Napa State Hospital and the California Veterans Home are not subject to proration. The California Constitution considers each "possession" to be separate and distinct. Thus, when one tenant moves out, their "possession" terminates at the end of the tax year and the new tenant starts a new, and different, "possession" of the same premises effective the first of the month after they move in.