What is a Mills Act contract and how does it change my property tax?

A Mills Act contract is the single most powerful preservation incentive available to San Diego homeowners, but it is a tax instrument before it is anything else. The program is authorized by California Government Code Sections 50280 through 50290, originally enacted in 1972, and is implemented locally through San Diego Municipal Code Chapter 14, Article 3, Division 2. Once a property is designated on the City of San Diego Historical Resources Register, the owner can sign a 10-year rolling contract with the City committing to a written rehabilitation and maintenance schedule. In exchange, the County Assessor reassesses the property under the Mills Act capitalization-of-income method specified in Revenue and Taxation Code Section 439.2 rather than the standard Proposition 13 base.

The Mills Act formula divides projected net operating income by a capitalization rate that combines an interest component, a historic-property risk component, an amortization component, and an effective tax-rate component. For owner-occupied historic homes, the imputed rent is calculated from market comparables, then expenses are subtracted. The result is typically an assessed value 40 to 70 percent below the Proposition 13 factored base. On a $2 million Mission Hills bungalow paying $22,000 a year in property tax, a Mills Act reassessment routinely drops the bill to $7,000 to $11,000, banking $11,000 to $15,000 in annual savings.

The trade-off is durable preservation oversight. Every exterior alteration, window replacement, paving change, and accessory structure requires Historical Resources Board sign-off for the life of the contract, and the contract auto-renews each year unless either party files non-renewal. Breach is enforced through GC Section 50286 with a 12.5 percent cancellation penalty applied to the current fair market value, which is far steeper than the prior decade of tax savings. The contract is recorded against title and runs with the land, so the next owner inherits both the savings and the obligations.