How the recession has impacted the value of your real and personal property and why you may be overpaying property taxes.
There’s cost, there’s book value, there’s income tax value and there’s GAAP value. These are all values that accountants use. You might think that property taxes are based on one of these and that accountants know how to determine the correct value for purposes of filing your property tax forms. You’d be wrong.
If you think that just because you haven’t had a property tax audit problem that you don’t have a property tax savings opportunity you may also be wrong. Your taxes may be based on inflated values, inappropriate breakouts or a misapplied methodology.
Property taxes are a breed apart. While the GAAP and tax experts focus on how an asset expires – i.e. how much depreciation expense to show on the financial or the tax return, the property tax consultant and the property tax authorities are looking at what the asset is worth.
Want to know more? See this article by property tax expert Larry Mandell of Independent Tax Group
A Property Tax Primer
Property tax is different than most other areas of tax. Income tax and Sales and Use tax are based on code/statutes/regulations, simple mathematics and transactional data. Property tax is based on value; i.e. what is an asset worth to a buyer in an open market purchase, also known as Fair Market Value (FMV).
Most areas of tax are handled by accountants or attorneys as they are very comfortable with the highly regulated process and basic math that yields the income-based and transactional taxes. Property tax, however, is primarily handled by appraisers or valuation experts, and is far more of an art than a mathematical exercise. The assessor’s office is staffed by appraisers and valuation experts. When property tax professionals talk with assessors, they talk the language of value, the methods in which value is determined and the adjusting effects on value brought about by changes in economic conditions. Rarely is there a discussion of law.
Within the property tax realm there are two forms of tax, real property and personal property. Personal property is comprised of the fixed assets of a company (machinery and equipment, office fixtures, office equipment, etc.). Think of personal property as something that you can pick up and move without much trouble. Real property is the land and structures/buildings on or attached to the land.
Specific types of commercial real estate (office buildings, retail, mixed use) will generally only have the real estate component that is subject to property taxation. However, leasehold improvements can be considered personal property and must be reported by the party that paid for the improvement.
Other types of real property such as hotels, healthcare, restaurants, etc. will have both real property and personal property that is taxable. Regardless of whether the property’s occupant owns or leases the property, they are paying the property tax. If a tenant leases the entire building, they generally have the right to appeal the real estate taxes as they are the directly affected party.
Business personal property is more complex than it appears. Each year a form must be filed to tell the assessor what you own, when you purchased it and where it is located. There are several categories of assets used on the form such as machinery and equipment, office equipment, computers, etc. While these would seem to be broad and straightforward categories, it is up to the taxpayer to fit their assets and their internal classifications into the assessor’s filing requirements. More often than not, the taxpayer’s and the assessor’s perception of an asset, group of assets, or industry will vary. There are valuation schedules set up for each industry.
This discrepancy between the taxpayers’ classification and the assessors’ can cost the taxpayer significant money every year. The factors used to determine taxable value can be very different from one asset class or industry to another. Improper classification and the reporting of non-taxable assets can lead to significant excess tax payments.
As property tax consultants we understand the methodologies used by the assessor to calculate value and the circumstances in which one method might be inappropriate, or less applicable than another. We understand the assessor’s internal process (many consultants get their start in the assessor’s office) used to determine the taxable values to be enrolled, and the time pressures they are under to accomplish this task by the statutory deadline. We understand not only the rules of the game, but also the customs of the assessment practice.
In any business or profession there is generally a process that must be followed in order to achieve the maximum benefit. If you are seeking to maximize a particular benefit, you will employ the correct techniques and the most knowledgeable personnel to achieve that benefit. Achieving a property tax reduction, because of the multiple approaches that determine value, demands the right approach, data, methods and professional to bring the two together.
The following examples highlight some of the benefits a property tax professional can bring to the table on your behalf.
Our fees are typically on a contingency basis.
- Manufacturer moved into a building and had to spend $3,000,000 in improvements to make it suitable for their mfg. process. They filed for a building permit which told the real estate group within the assessor’s office that there was value being added to the building (increased assessment). For book purposes the leasehold improvements were entered into the fixed asset system to be depreciated. These improvements were reported to the assessor as required by law with the personal property filing. The personal property side taxed these as well. This resulted in double taxation which we successfully eliminated. Tax savings of approximately $30,000 annually.
- A company took over space in a building and made the leasehold improvements necessary to conduct business. They properly reported the improvements which were depreciated over 15 years. At the end of the 4
- A manufacturer spent $4,000,000 in new equipment one year and added an equivalent lump sum to the fixed asset system in the year purchased. They reported this entire amount as M&E on the annual personal property tax form, subjecting this figure to the taxable value table set up for 15 years, which is typical for M&E. Upon review of the assets we determined that less than $1,000,000 should be subject to a 15 year life, and that the majority of the assets purchased was only 7 years. Tax savings of approximately $22,000 per year for the 7 years of avoided taxable years.
- An office building owner had tenants under long term leases which were above current market rents and the assessed value of the property was also above market. Although operating income justified the assessment, the consultant successfully reduced the assessed value to market. The rationale employed was that the taxpayer should not be penalized due to a more efficient operation than other property owners since they would not get a break if it went the other way.
- Parents were transferring long held real estate to their children. When there is a transfer of ownership in CA the property is reappraised to current market, unless it is going to children. The person handling the transfer of the property improperly filled out the paperwork which resulted in an increased tax assessment of $250,000.
In summary, property tax professionals look at property in a much different way than owners and real estate professionals. Real estate professionals, like the assessors, are looking to maximize the value of a property, albeit for their own different purposes. And owners, for their own part, do not want their property to go down in value for any reason. This divergence of goals and purposes is where the property tax professional can reduce the property tax burden and help the taxpayer boost the bottom line.
Written by Larry Mandell,