Every state has its own rules for the practice and ownership of real estate, and California is no different. If you're going to be investing here, there are three California real estate laws that you should keep in mind as you structure your investments and the way that you do transactions:
1. Proposition 13
One of the most storied citizen-passed laws, Proposition 13 governs the California property tax system. Under Prop 13, the state's property tax rate is fixed at 1 percent, and taxes can only go up in an amount proportional to the increase in a property's value or at a rate of 2 percent per year -- whichever is less. In other words, if someone bought a house for $20,000 in 1970 and still owns it today in 2013, the taxes would be based on a value of roughly $47,000 -- which is 2 percent growth per year for 43 years. The state tax would have gone from $200 to roughly $470.
However, if a property changes hands, it gets reassessed at the new value. If you buy that house with a $470 property tax bill for $350,000, your taxes will immediately jump to $3,500. This also applies if you buy a house inexpensively and fix it up since new construction gets assessed.
2. Cal-FIRPTA
Cal-FIRPTA is one of the California real estate laws that can come back to bite you at closing. Under Cal-FIRPTA, 3-1/3 percent of the sales price has to be withheld by the closing agent as an advance against any tax liability on the sale. It doesn't apply to sales under $100,000, sales that don't result in a taxable gain or to principal residences, but it will usually apply to sales of investment properties. One way to avoid paying Cal-FIRPTA is to structure your sale as a 1031 Exchange.
3. Licensing
Unlike some states, California real estate laws don't cap the number of transactions that you can do for yourself without a real estate license. However, if you want to employ people on your team that have licenses, you will need a broker's license. In addition, holding a California license may make it easier for you to access MLS listing services and find new listings before other investors can tap them.
