Understanding New Construction
Under California property tax law, "new construction" is defined in four general categories:
- Any substantial addition to land or improvements, including fixtures.
- Any physical alteration of any improvement, or a portion thereof, to a "like new" condition, or to extend its economic life, or to change the way in which the improvement, or portion thereof, is used.
- Any substantial physical alteration of land which constitutes a major rehabilitation of the land or changes the manner in which it is used.
- Any substantial physical rehabilitation, renovation or modernization of any fixture that converts it to the substantial equivalent of a new fixture or any substitution of a new fixture.
Normal maintenance and repair, such as replacing a roof, is not considered new construction and is not subject to assessment.
Repairs due to misfortune or calamity, such as earthquake, fire or flood damage, may entitle the property owner to tax relief during the time of construction. See Disaster/Calamity Relief for more details.
“Like New” Construction versus Remodeling
In general, remodeling work is primarily cosmetic while “like new,” i.e. substantially equivalent to new construction involves more substantial structural changes.
Remodeling work is not generally subject to reassessment unless new square footage or fixtures are added. It can include new carpeting, countertops, cabinets or windows. While remodeling work usually improves a building’s appearance, it does not change the effective age.
If a remodeling project is extensive, it may constitute the “substantial equivalent” of a new structure. In this case, the substantially equivalent to new construction is assessable. It generally includes substantial changes to the plumbing system, electrical system, framing or foundation, and changes the effective age of a building by extending the usable life.
When determining whether construction is considered “like new” or remodeling only, it is important to note that because every property is unique, so too is every new construction case.
Valuing New Construction
In determining the value of new construction, only the improvement being added is considered. If construction is in progress over any January 1 lien date, an estimate of value of the portion completed is added to the property’s assessment. The Assessor’s Office is required by law to value new construction whether or not a building permit has been issued.
Value is determined using appraisal methods that include the cost approach, the sales comparison approach and the income approach.
When valuing additions to a property or partial completion of new or substantially equivalent to new construction, the cost approach is often utilized. The cost approach considers all costs typically incurred during the course of construction. These “full economic costs” include the market value of labor, materials, permit fees contractor’s overhead and profit. The costs used in this approach are published and updated each year by California’s State Board of Equalization. (The price actually paid by a property owner for the completed project may be different than State-published costs.) This establishes a base year value for the new portion of construction only. The base year value for any remaining improvements that did not undergo new construction will not be changed.
To value new and “like new” projects, the sales comparison approach is most preferred. This involves appraising both the full market value of the property (land and improvements) as well as the market value of the land alone as of the date of construction completion. From these two appraisals, the value of the new improvements to the property is determined. When valuing a substantially equivalent to new project, credit may be given to improvements that remain from before construction, such as foundation, subfloor and unimproved rooms. A new base year value for the improvements is established after construction is completed, replacing the original base year value of the improvements before construction.
New construction associated with income producing properties may be assessed using the income approach. Here, the methodology is similar to the sales comparison approach because the market value of the total property is determined based on the income that the subject property could generate.
Any new construction that adds value to the property will generate a one-time supplemental assessment that represents the market value of the new improvements at the completion of construction. The supplemental accounts for the difference between the value existing on the assessment roll as of the most recent January 1 lien date and the new value after completion.
|If you plan to develop property with the intent to re-sell, you may be eligible for a builder’s exclusion.
|If you have suffered a loss due to misfortune or calamity, you may be entitled to property tax relief.
|Seismic Safety Construction Exclusion
|Solar Energy Exclusion
- FAQ Provided by the State Board of Equalization
- Assessor Larry Stone speaks about the difference between remodeling and assessable new construction