Laws, Regulations & Annotations

Property Taxes Law Guide – Revision 2014

Revenue and Taxation Code

Property Taxation

Part 1. General Provisions

Chapter 1. Construction

Section 110.5

110.5. "Full value." "Full value" means fair market value, full cash value, or such other value standard as is prescribed by the Constitution or in this code under the authorization of the Constitution.

History.—Added by Stats. 1974, Ch. 311, p. 589, in effect January 1, 1975. Stats. 1978, Ch. 292, in effect June 24, 1978, added the phrase "full cash value,".

Value—Publicly Owned Property.—Insofar as a county included the exempt reversionary interest pursuant to Government Code Section 7510, subdivision (b)(1) when the county assessed a commercial lessee's possessory interest under Revenue and Taxation Code Section 107 for property owned by a state public retirement system, the valuation methodology is facially unconstitutional because it violates California Constitution Article XIII, Section 3, subdivision (a), by assessing property tax on publicly-owned real property; further, the valuation methodology violates California Constitution Article XIII, Section 1, by assessing property in excess of its fair market value as defined in Revenue and Taxation Code Sections 110, subdivision (a), and 110.5. California State Teachers’ Retirement System v. County of Los Angeles (2013) 216 Cal.App.4th 41.

Valuation methods.—Property subject to taxation must be assessed at its full value, which is defined as its full cash value or fair market value (Revenue and Taxation Code Sections 110.5, 401). There are three basic methods for calculating fair market value: (1) the comparative sales or market data method; (2) the reproduction or replacement cost method; and (3) the income method (Property Tax Rules 3, 4, 6, 8). Dreyer’s Grand Ice Cream, Inc. v. County of Kern (2013) 218 Cal.App.4th 828.

Value—Cost approach—Depreciation types.—The cost approach to property valuation is based upon the economic principle of substitution, which holds that a rational person will pay no more for a property than the cost of acquiring a satisfactory substitute. It begins with either reproduction cost, replacement cost, or historical cost; it then makes adjustments for depreciation to reach an estimate of current value, that is, physical deterioration, functional obsolescence, and external obsolescence. Dreyer’s Grand Ice Cream, Inc. v. County of Kern (2013) 218 Cal.App.4th 828.

Value—Cost approach—Economic or external obsolescence.—Taxpayer that challenged the assessment of property tax on equipment and personal property in its novelty ice cream production lines is not entitled to a reduction in the value of the property, based on excess capacity or underutilization of the property, under the cost approach to valuation because the taxpayer did not present sufficient evidence of either excess capacity or external market condition, resulting in economic obsolescence. Dreyer’s Grand Ice Cream, Inc. v. County of Kern (2013) 218 Cal.App.4th 828.

Value—Cost approach—Underutilization adjustment.—Property Tax Rule 6, subdivision (e), requires that the reproduction or replacement value of the property be adjusted for overimprovement only when overimprovement or underutilization is shown to exist and that underutilization affects the fair market value of the property. Thus, not all uses at less than full capacity constitute underutilization for purposes of the rule. The underutilization adjustment is only appropriate when there is excess capacity that is beyond the control of a prudent operator and is recognized in the market. Dreyer’s Grand Ice Cream, Inc. v. County of Kern (2013) 218 Cal.App.4th 828.

Valuation methodology.—Legally incorrect methodology was used to assess the value of wind turbine generators and related equipment because the assessor used an average rate that includes taxes paid to other states. Under the income method (Property Tax Rule 8), the appropriate tax rate for the conversion from an after-tax to a before-tax discount rate is the typical potential purchaser's expected combined California and federal marginal income tax rate. Sky River LLC et al. v. County of Kern (2013) 214 Cal.App.4th 720.