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In California seller usually factors in many of the fees in the listing price, such as the seller and buyer agent fees. To best of my understanding these fees can amount to around 3% for each agent.

So when government asses property tax, then are these fees subtracted from the taxable basis for property tax calculations? Or does the new home owner have to pay property tax also on the fees?

Update #1: As more concrete example, my understanding is that a knowledgeable buyer who is not represented by buyer agent is more likely to negotiate a 2-3% discount compared to a buyer who is represented by buyer agent because the former will not incur buyer agent fees for the seller. So would the former have to pay less property tax or would the property tax be the same for both buyers because fees are subtracted?

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  • While it may be different in California, in most places property tax has no direct connection with the sale price. Instead, it goes by assessed value. Otherwise you could for instance get a lower tax bill by stating a low sales price, and paying the seller the balance "under the table". – jamesqf Jun 28 '20 at 4:02
  • @jamesqf according to this SFgate.com quote "The base year value is set when you initially purchase the property, based on the sales price listed on the deed." I believe property tax in CA is initialized to purchase price and in further years assessed on prop 8 and prop 13. – user389238 Jun 28 '20 at 16:30
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I think I get your question, and in short would say that yes, you'll likely capture additional "savings" by having a lower property tax basis if you represent yourself or negotiate lower fees.

Quick context: I just purchased my first property and used one agent as dual-representation.

Hypothetical "normal" residential real estate transaction:

  • List price: $500,000
  • two real estate agents each taking a 3% fee
  • Total price that the buyer pays: $500,000 (regardless of financing/down payment)
  • Previous owner gets: $470,000 (since seller "pays" for both agents, and each agent gets $15k)
  • Property tax of 1%: $5,000 per year

Now let's say you're an agent, or you want to represent yourself and therefore the seller's agent is only going to take their 3%, and give you 3% discount.

  • List price: $485,000
  • Previous owner gets: $470,450 (slightly more, since 3% to agent is off a smaller number)
  • Property tax of 1%: $4,704.50 per year

I this case you're not only saving $15k on the purchase price but also $300/yr in lower taxes. However, sometimes the way it could workout is that the seller's agent has the property "under contract" with a total commission of 6%, and then it's up to them to give as much as they want to the buyer's agent or the buyer directly. So they then might offer a $15k post-purchase credit rather than a discount. In that case your property taxes remain the same as in the base-case.

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  • This totally make sense to me, but is there a form/spreadsheet that would establish how to tax basis is calculated? One user suggested HUD-1 but best to my understanding that is a form involved when house is bought with mortgage. What if house is bought with cash? – user389238 Jul 6 '20 at 23:11
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    at least in the state of california I know it's based on whatever the sale price is listed on the RPA document (res purchase agreement). whether it's a cash sale or with a mortgage, you still have to sign an RPA. CA also has prop 13 which is unique, in that your property tax is basically never re-assesed, and there are also some circumstances when you can roll over your old tax basis (e.g. you owned your home for 20yrs and are upgrading to a bigger home). I'm definitely not a tax expert though so would recommend doing your own research / talking to a CPA. – bbrails09 Jul 8 '20 at 3:49
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You are misunderstanding how it works. The listing or sale price doesn't include any of the fees. Those will all be figured out later based on how the contract is worked out and which escrow company is used. Property tax will be based on the sale price only. If you reside in the house, you can apply for a homestead exemption which will slightly reduce the property tax.

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  • It is not exactly clear to me what you meant with "sale price". Obviously, because of all the fees the amount of money buyer had to take out of his pocket will always be more than what seller put in his pocket. So which of the two amounts will be multiplied by 0.77% to calculate property tax? – user389238 Jun 27 '20 at 6:41
  • The base sale price. If a property is listed as 500000 and you make an offer of 495000 which is accepted, that's the property tax amount. You as the buyer will have to pay more than that amount, some of the 'closing costs'. – mkennedy Jun 27 '20 at 6:45
  • Are you sure the buyer agent fee, usually around 2-3% is not already baked in the $495000? At least that is the impression I got after reading this - redfin.com/home-selling-guide/commission-fees-explained Although you may be right that closing fees are not baked in those 495000 and that is something that buyer has to pay on top and would not be used for property tax assessment. – user389238 Jun 27 '20 at 7:13
  • Yes. A seller certainly may have calculated the sale price knowing that they have to pay the real estate agents' commissions, but it's still the sale price that the property tax will be based on. (I've bought 2 houses; sold 1 in california) – mkennedy Jun 27 '20 at 7:17
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    I think the question can be boiled down to "which line on the HUD-1 from is used for the base value?" – mhoran_psprep Jun 27 '20 at 12:52

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