Why California cap rates need a tax adjustment
A California buyer pays property tax on the purchase price, not on the seller's old assessed value, so the seller's NOI usually overstates what the buyer will earn.
- The 1% limit. Under Proposition 13, ad valorem tax on real property may not exceed 1% of full cash value, plus rates for voter-approved debt.[1] The statewide rate is "one percent plus the rate necessary to fund local voter-approved bonded indebtedness", and special assessments or direct charges can be added to the bill.[2]
- Reassessment at purchase. Property is reassessed to market value only on a change in ownership or new construction; a purchase is a change in ownership.[2] The county assigns an assessed value equal to the purchase price.[6]
- At most 2% a year after that. The base year value is adjusted each year by the California CPI, capped at 2%.[1][2] The factor for 2026-27 is 1.02, even though the measured CPI rose 3.307%.[4]
- Supplemental bills. The new value takes effect from the date of purchase through supplemental assessments, so the higher tax starts in the first year; a purchase between January 1 and May 31 brings two supplemental bills.[3]
| Seller's statement | After your purchase | |
|---|---|---|
| Property tax | $6,200 | $18,645 |
| NOI | $82,392 | $69,947 |
| Cap rate at $1,500,000 | 5.49% | 4.66% |
To earn the advertised 5.49% after reassessment, the price would have to be about $1,313,580.
Average property tax rates by county
The statewide average property tax rate for 2026-27 is 1.157%, computed by the Board of Equalization from total levies and net taxable value in all 58 counties.[5]
| County | Average rate | Tax on $1,000,000 |
|---|---|---|
| Los Angeles | 1.183% | $11,830 |
| Orange | 1.066% | $10,660 |
| San Diego | 1.187% | $11,870 |
| Riverside | 1.165% | $11,650 |
| San Bernardino | 1.133% | $11,330 |
| Sacramento | 1.151% | $11,510 |
| Alameda | 1.230% | $12,300 |
| San Francisco | 1.182% | $11,820 |
| Santa Clara | 1.205% | $12,050 |
| Fresno | 1.221% | $12,210 |
| Kern | 1.254% | $12,540 |
| Statewide average | 1.157% | $11,570 |
These are county averages; each parcel pays the rate of its own tax rate area, and voter-approved rates vary within a county.[3] A typical bill can also include parcel taxes, Mello-Roos taxes and assessments that are not based on value.[6] Use the rate and direct charges from the property's own tax bill when you have them.
The California rent cap (AB 1482)
For covered units, rent may not rise by more than 5% plus the regional change in the cost of living, or 10%, whichever is lower, over any 12 months, in no more than two increases.[7] The Attorney General publishes the resulting maximums by region:[8]
| Area | Increases from 8/1/25 to 7/31/26 | Increases from 8/1/26 to 7/31/27 |
|---|---|---|
| Los Angeles and Orange counties | 8% | 8.7% |
| Riverside and San Bernardino counties | 7.5% | 8.1% |
| San Diego County | 8.8% | 8.2% |
| San Francisco Bay Area (Alameda, Contra Costa, Marin, San Francisco, San Mateo) | 6.3% | 8.8% |
| All other counties | 7.7% | 8.6% |
The rule has exemptions that matter to investors:[7]
- Housing that received a certificate of occupancy within the previous 15 years.
- Single-family homes and condominiums not owned by a REIT, a corporation or an LLC with a corporate member, if tenants receive the required written notice.
- A duplex in which the owner lives in one unit as a principal residence.
When a tenancy ends and no prior tenant remains, the owner may set the new rent. Where a city or county rent control ordinance allows a smaller increase, the local rule applies.[7][8] The section is scheduled to be repealed on January 1, 2030.[7]
What it means for NOI growth
Both sides of NOI are capped differently in California: rent increases on covered units are limited by AB 1482 (or a stricter local ordinance), while the owner's assessed value can rise at most 2% a year until the next sale. A buyer's first-year tax resets to the purchase price, so a property bought at a low cap rate cannot count on fast rent growth in rent-capped units to close the gap. Model the years ahead with your own assumptions on the investment property calculator or the DCF calculator.
No market averages hereWe do not publish average California cap rates: we found no official source for them, and averages hide the differences between buildings. Compare a listing with recent local sales, after recomputing their NOI with a buyer's tax too. The good cap rate guide explains the tests, and the cap rate calculator handles properties outside California.
Frequently asked questions
How is property tax calculated on a California rental after you buy it?
The assessed value resets to the purchase price. Tax is the 1% Proposition 13 rate plus local voter-approved rates on that value, plus any direct charges; the 2026-27 county averages run from 1.000% to 1.254%.
What is the maximum rent increase in California in 2026?
For covered units, 5% plus regional inflation, capped at 10%. For increases taking effect from August 1, 2026, the Attorney General lists 8.7% for Los Angeles and Orange counties and 8.6% for counties not listed separately.
Does the California rent cap apply to single-family rentals?
Not if the owner is an individual (not a REIT, a corporation or an LLC with a corporate member) and the tenant got the required written notice. It also does not apply to housing built within the last 15 years.
Why are California cap rates lower after the sale?
Because the seller's tax bill reflects an old assessed value. A buyer is reassessed at the purchase price, which raises the property tax and lowers NOI.
Sources
- California Constitution, Article XIII A (Proposition 13)
- How Property Is Assessed for Property Tax Purposes (Publication 800-10)
- California Property Tax: An Overview (Publication 29)
- 2026-27 California Consumer Price Index (Letter To Assessors No. 2026/002)
- Computation of the Tax Rate Applicable to 2026-27 Private Railroad Car Tax Assessments (statewide and county average tax rates)
- Understanding California's Property Taxes
- Civil Code § 1947.12 (Tenant Protection Act rent cap)
- Limits on Rent Increases