Add-ons can be taxing

When Gary Teunissen decided to add 400 square feet to his 40-year-old ranch home in Orange, he realized the extra space created by extending the kitchen and enclosing a breezeway would boost his annual property tax bill by about $500.

“The key decision was whether to remodel or buy,” said Teunissen, a financial analyst for a national home builder. “The property tax issue was a big part of my analysis.”

After crunching the numbers and considering the taxes on a new purchase versus an enlarged home, he decided it made more economic sense to remodel.

Unlike Teunissen, many homeowners don’t anticipate the property tax changes that come with an additional bedroom or den. Depending on the size and scope of the remodel, an owner’s annual tax bill can jump hundreds, or even thousands, of dollars.

Not every remodeling job results in a higher tax assessment, which takes cost into consideration but is usually tied to an increase of square footage, such as an additional bedroom or office. And though there aren’t many ways to limit or reduce this hike, homeowners who tear down their existing houses but leave a portion of the original structure standing can get a small tax break.

How does the county tax assessor know someone is remodeling? Cities are required to provide the assessor’s office with a summary of building permits. The assessor’s staff then examines each permit to determine if a tax reassessment is needed.

Expanding a home’s footprint is a sure ticket to higher property taxes, said Robert Quon, Los Angeles County director of assessor’s operations. “Additional square footage will trigger an increase.”

Beyond reviewing building permits, the assessor also has some less formal sources, said Robert Knowles, media deputy of the Los Angeles County assessor’s office.

“With a garage conversion, it’s not uncommon for neighbors -- particularly if they’re not all that friendly -- to call the city or the assessor’s office,” Knowles said.

Property tax collections throughout California have risen steadily in recent years due largely to escalating sales prices, but home expansions have contributed too. Los Angeles County’s fiscal budget for 2003-04, for example, included $2.46 billion in property tax revenue, up from $2.16 billion in 2001-02. The tax goes into a general fund and finances a variety of county departments, including law enforcement, health and administrative agencies.

It’s difficult to determine exactly how much of that revenue is the result of home remodeling, however, because L.A. County doesn’t break down its tax figures into existing versus expansion categories, Quon said.

Still, home improvement is more popular than ever. The National Assn. of the Remodeling Industry estimates that Americans will spend about $224 billion to renovate their homes this year -- nearly 50% more than the $150 billion spent in 2000.

For homeowners spending five or six figures on a project, property taxes aren’t always an immediate concern.

When Joe and Lupe Barrios paid $425,000 for a four-bedroom fixer-upper in La Mirada two years ago, they knew they had their work cut out for them.

“The house was a total wreck,” Lupe Barrios said. “It was a mess.”

The couple installed new plumbing and electrical systems, patched holes in the walls, expanded the kitchen and added a TV room. The tax issue, she said, was “the least of our worries.”

Cosmetic improvements that don’t involve adding extra space, such as remodeling a kitchen or bathroom, typically won’t lead to higher taxes. But that’s not always the case.

“If you use an existing closet to add a new bathroom, that would trigger a reassessment,” said Barry Bosscher, special assistant at the L.A. County assessor’s office. Other property improvements, including a new swimming pool, spa or patio cover, can also boost your tax bill.

Tax hikes sometimes kick in before a project is completed.

“There are incremental adjustments. Let’s say you’re adding a family room addition and you only have enough time to do the slab foundation by the end of the work year,” said Gil Parisi, director of administrative roll services at the L.A. County assessor’s office. “We would assess you only for that portion.”

Confused? Even experts agree that reassessment rules are a tad convoluted.

New construction and remodeling rules “are, for lack of a better word, a bit gray,” said John Opferman, an appraiser with Westlake Village-based Assessment Counselling Services, a legal firm that specializes in property tax assessments.

“I could spend $100,000 redoing my floor, but because it’s only a floor, it’s not new construction,” said Opferman, who used to work in the L.A. County assessor’s office. “But if I take my bedroom and completely break it down to the studs -- new floor, walls, electrical and ceilings -- the [assessor] could make the argument that it’s the equivalent of new.”

Is there a way to determine the property tax increase for a room addition before the bill arrives? Opferman suggests this formula as a guideline for home remodelers: Take the construction cost of the project, add 25% for extra expenses, such as architectural and engineering costs, and multiply the total by the current tax rate.

For instance, if the construction cost of your home expansion is $200,000, add $50,000. Next, multiply $250,000 by 1.25%, the average property tax rate in L.A. County. The result is an annual property tax increase of $3,125.

Not all assessors follow this formula, however, particularly when dealing with an irate homeowner.

“Quite often, taxpayers will get really upset when they get their tax bill,” Opferman said. “They spend the $200,000 on the addition, and then they get a tax bill based on $250,000. They don’t understand.”

While this is the standard practice throughout the state, some county assessors will base tax increases on construction costs only.

“They’ll say, ‘OK, if that’s what you paid the contractor, fine.’ And that’ll be your assessment,” he said.

Legal loopholes? Sorry. There aren’t many ways to avoid or reduce the tax consequences of a home expansion aside from such blatantly illegal tactics as underestimating the cost of the project or failing to obtain a building permit.

However, homeowners who intend to demolish and build from scratch can receive a small tax break by leaving a portion of the original structure standing.

“There’s a slight benefit if you’ve kept the foundation and a portion of the studs,” said Bosscher of the L.A. agency. “Not all of the house is new, so we would do sort of a blend. Say, 5% of [the original] value, and 95% as new.”

Under Proposition 13, the perennially divisive California constitutional amendment passed by state voters in 1978, property is reassessed only after a change of ownership or, with some exceptions to these rules, when new construction is completed.

In some instances, property owners who bought their homes long ago could pay significantly lower taxes on the original structure than they would on an additional bedroom, bath or office. But now, as a result of rapidly escalating home prices, the consequences of expanding a home are less taxing than the option of buying a larger house.

Bill Gerich bought his Rancho Palos Verdes ranch home in 1994 for $350,000. Last year he completed a 700-square-foot addition, including an expanded living room and a new master bedroom and guest room. The $200,000 remodel boosted the assessed value of Gerich’s house to $550,000.

In today’s market, Gerich said he thinks a comparable house might sell for several hundred thousand dollars more. Moving instead of remodeling, he said, “would have brought a very, very big property tax increase.”

What if you disagree with your property tax assessment? Fight it. Assessors make mistakes too.

“They’re conducting mass appraisals, knocking out appraisals as quickly as they can,” said Robert Slavin, attorney and president of Assessment Counselling Services. “They don’t have a lot of time.”

When appealing your tax bill, bring evidence to the county assessor that supports your case. For instance, did the assessor miscalculate the square footage of the expansion? In most cases, the assessor is willing to readjust if the homeowner has reasonable evidence that shows the amount was too high.

“A lot of times, disagreements regarding value can be resolved by getting a lot of factual information to the assessor,” Slavin said. “Quite often, if you’re willing to assist them and bring relevant information to their attention, they’ll make a correction.”

Jeff Bertolucci can be reached at jbert@aol.com.