Our Mills Act Tax Savings + The Secret Calculation & Some Financial Transparency

I shared awhile back that our home was designated historic - yay! I already went into the nitty gritty of how we got our home designated, what it means to be designated, what Mills Act is, and the pros and cons of how it affected our home in this blog post. Give that one a read first or you’ll have no idea what I’m talking about here.

So, I’m here to update you on where we’re at in that process and also share some nitty gritty finances with you. If you’re thinking about applying for Mills Act, this post is for you. If you like snooping on other people’s finances, this post is also for you.

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To back up, here’s a brief timeline of events - for fun and to give you a better idea of the saga. Our neighborhood earned historic designation in October of 2017. Then, a resident fought the Historic Resource Board because he didn’t want his house included which meant all of our neighborhood designation was put on hold. There were several hearings and ultimately this guy and a couple other upset neighbors had their homes removed from the neighborhood designation, and all of us excited folks got our homes cool historic titles. But! This all happened in the winter of 2018 so by the time the hearings were over, everyone missed out on the January deadlines to apply for Mills Act (remember, read this blog post to know what this special tax-savings program is). The neighborhood was PISSED. Luckily, the fine people at the City said we all could apply retroactively, so everyone did a mad dash to submit our applications. Like, really mad dash. I was one of the last people to submit, and I think it’s safe to say you all know that I love making spreadsheets and researching and getting paperwork turned in, so the notion that people beat me is baffling. It’s worth noting that the City can run out of funding if they get too many applications, so being last in line could have cost us.

Anyway, this was the spring of 2018, then in October of 2018 we got word that we were awarded with Mills Act! We went to the City and signed a contract in November of 2018 and we were officially in business. Since that date in November, we’ve been in a contract with the City of San Diego to do select repair jobs to the house and also follow their guidelines which included getting all jobs permitted. If you follow me on Instagram, you know I’ve been dealing with the kitchen permit process for the last four months, but I’ll touch on this in another post.

Basically, it took us a year to get all of our ducks in a row. I spelled out that timeline because we’ll come back to in later. Hold onto that thought.

After our November signing, the necessary paperwork was submitted to the State of California Office of Historic Preservation and submitted to our County Assessors Office. Then, we waited to find out how our property taxes would change. (Seriously, if you haven’t read this post about our designation and Mills Act but you’ve made it this far, I’m amazed because nothing in this post should make sense to you).

We were super anxious to find out what our potential Mills Act savings would be so we dug around to figure out what the calculation is. There’s an equation that the assessor will tell only OVER THE PHONE so we called, left a message, waited for a call back, got a call, then ferociously scribbled down a bunch of words that would have been so much easier to digest had they been emailed to us, or better yet been made available on the world wide web for everyone to calculate at whatever hour of the day they so please. Well people, I’m here to share the equation with you (and no, I’m not the first person to put this on the internet, and no I’m not giving away any government secrets).

In an essence, what the City does is re-assesses the value of our house based the lowest result of one of three equations. The most popular equation is the one we fell into which is: the net income we could make if we were to rent out our house divided that by the capitalization rate. The number that comes from this equation is our newly assessed value of the property from which property taxes are applied.

Here’s the calculation we used:

(Monthly Rent Potential x 12 months) - Expenses = Net Annual Income

($3,000 x 12) - $5,000 = $31,000

Interest + Historic Risk + Amortization + Local Property Tax Rate = Capitalization Rate

4% + 4% + 0.8% + 1.175% = 9.975%

Net Income / Capitalization Rate = New Valuation

$31,000 / 9.975% = $310,777

New Valuation x Local Property Tax Rate = New Estimated Taxes Owed

$310,777 x 1.175% = $3,652

How we got some of those numbers:

Each year the State determines the Interest Component (2013 = 3.75%; 2014 = 4.0%; 2015 = 4.25%; 2016 = 4.25%; 2017 = 3.75%; 2018 = 4.0%).  A Risk Component of either 2% or 4% based on owner occupancy status (Owner Occupied Single Family Dwelling = 4%; All Others = 2%).  A property tax rate component (which will be 1.XXXXX% depending on Tax Rate Area; a flat 1% can be used for estimation purposes). And an amortization component (based on building ratio & reciprocal of estimated remaining economic life of improvement/building; Can typically range from 0.5-1.0%).

So, with this calculation we expected to owe $3,652 in taxes under Mills Act. But, we were only guessing at the numbers so we had to wait nearly a year to find out what the actual number is. Plus, there was no sense in over-calculating because we wouldn’t see the savings until our taxes were due a year later after getting word anyway. Well, we got the number last week.

Drumroll…

Our home’s new valuation is: $245,254

Which means we are now going to pay in taxes: $2,881

Which means we are going to save annually from our previous tax payments: $5,401

Some of you may be rejoicing with us at the thought of how much we’re saving. Some of you may still be grappling with the thought of how much our property taxes are. Yeah, 1.175% is a lot (plus state, federal, and sales tax) but I also don’t have to pay to have my driveway plowed in the winter. And there’s also a ton of other perks of being in California, too.

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So, we’re expected to save $5,401 in property taxes every. single. year. Now, this can change if our property tax rate changes or if the Assessor re-evaluates our home. Since I've submitted construction plans for our newly remodeled kitchen and bathroom addition to the City, they calculated a semi-random dollar amount of added value to our house and it’s been recorded at the Accessor’s Office. So our valuation next year might be greater because of this reported addition in value - but we’ll see.

Before you get excited and ask, “what are you going to spend that money on?!” Remember that this tax savings is designed to go back into the house to maintain the historic home. And maintaining an old home is pricey - extra pricey to do it right. So this savings will go to the $5k I’ve already paid at the City to get my kitchen permits, and the $1k I spent on historic chimney restoration, and the $1k on custom historic windows, and the $250 Mills Act application fee, and the $350 historic plaque, and the extra costs for new solid wood doors, and the added expenses of getting custom-milled siding, and XYZ. We’ve put a bunch of money into this house over the last few years, and we’ll continue to for many more years, so this will help. PLUS, we’re not making money, we’re just not spending the money. So it’s not like we’re going to go buying a yacht with these extra funds. Perhaps though we will use the savings to spend our money a bit differently. Perhaps we’ll pay down a bit more of our mortgage principle this year, or we’ll donate more to social service organizations and schools that rely on state funding. (I’m definitely feeling guilt getting such a steep savings and not having those funds support important causes.)

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Back to that long story I told about the timeline and getting designated and all that jazz. We pay our property taxes in two installments, one in February and one in November. So, we’re expected to see savings of $2,700 on our upcoming fall bill - which is two whole years after getting our designation.

Sometimes we think, “damn, if only we applied for Mills Act when we bought the house four years ago, we could have saved $20,000 by now!” But that really isn’t the case. It’s already taken two years to see the savings since earning the designation. If we chose to pursue designation independently right when we bought the house (rather than earning it automatically with the rest of our neighborhood) we might have spent a year or two or three doing the research on the history of the house or we would have paid a professional research firm $5k to do it. Then, after the years of research, we would hope that they’d find some historic significance (remember, read this post to see what they’d need to find). Then we’d submit the packet to the City for review it to see if the house is worthy of designation - it’s really a gamble though. Then the process at the City would take time and money - I estimate a year and $1k.

So all in all, we got lucky. We didn’t have to spend $5k to the research firm only to have the designation handed to us for free. And the timing worked out the same had we applied when we bought the house or even sooner, actually. We also got lucky with a home that maintains much of its original features, so the required restoration work isn’t as intense as it is for some of my neighbors.

Here we are four years into owning our little home. It’s now Historic, and now it’s just a little bit easier to fork over the extra cash for custom millwork and restoration. Whew. Plus, our house’s resale value increases when new homeowners see how much they can save (Mills Act is transferable) but we aren’t selling anytime soon, people!

A cool part of earning the designation is we get to display a pretty plaque by our front door! This is an optional item that homeowners can buy ($350-$500) to show off how cool their house is, but it’s mandatory if the home is a part of Mills Act. We jumped at the opportunity to dress up our house just a bit.

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The plaque is solid bronze (please don’t come steal it) and it’s unique to our home with our historic site number (which I’ve blurred for privacy - and so you don’t come steal it). If we had our home designated independently (rather than through the neighborhood) it would say the name of our house which often is the name of the first homeowner or the architect/builder. Again for privacy I won’t tell you what our home’s name could have been, but let’s just say the first homeowner was a cool single lady and I’m damn proud of that.

Did you make it this far? Congratulations for reading all the way through what some will probably consider the most boring and inapplicable blog post I’ve ever written. Or maybe if you liked it, click the link below :)