The property tax system is hundreds of years old, full of local quirks and mired in bureaucracy, customs, politics, personality, case law and legislation. Once a small expense for contractors and real estate developers, property tax has grown rapidly and, in response to COVID-19, is expected to escalate faster than profits can support it. Fortunately, the economic ramifications of COVID-19 have opened new doors to reduce this burden. This article will acquaint you on how the system works, the appeal calendar and the tried-and-true bases for reducing property taxes.
Many business owners looking to reduce property taxes put their trust in a property tax service and hope the “system” will take care of it. These arrangements usually come with a hefty price tag: up to 50 percent in contingency fees should any reduction be realized. This is a high price to pay when owners can often manage the situation themselves or hire a consultant who charges by the hour.
Fair Market Value
Property tax is based on the fair market value or fair cash value of a property. This generally means the price on which a willing buyer and a willing seller agree. The value is set at a certain date, and the taxes are collected the following year.
The fair market value is generally adjusted by an assessment ratio and further adjusted by an equalization factor, both of which are set by law or regulation. The local tax rate, or the sum of all the tax rates of the various local entities, is then applied to calculate the taxes due. The fair market value determined by the Assessor is the only number in the process that should concern the taxpayer, as the rest are out of your control.
The Importance of Preparing for Assessments
Dates are important to keep top-of-mind when preparing for the assessment process. Based process. Based upon the assessment cycle, new assessments are posted on a certain date and can change every year. As a result, there is a short window to file an appeal: often no more than 30 days. It is a best practice to prepare months before the assessment is published and engage an appraisal consultant who works by the hour rather than on contingency. Here are ways you can prepare:
- Gather your tax bills and access the County Assessor website to research your property.
- Identify properties nearby that are similar in age, use and condition, and look up their tax information.
- Plan to visit the field appraiser (rather than the Assessor) well in advance of the assessment. A friendly conversation will yield solid information that you will consider back at the office.
- Request a copy of the Property Card for each parcel number in your tract and ask these four important questions:
What improvements are listed on each parcel?
What method(s) and accompanying data are used to calculate the value of the property – market sales, cost approach or income approach?
Is the Assessor using a Mass Appraisal to support the assessment? (If so, you will want a copy of this)
How has the Assessor separated equipment and business intangible assets? These are generally not taxable as real property.
During your visit, we encourage that you do not argue value with the Assessor’s representative. Instead, take the information for further analysis to consider whether you have a basis for an appeal. There are generally five bases for the appeal:
- The property card is in error, including improvements that have been demolished or are idle. Land area, age, capacity, use and condition may also be incorrect.
- Neighboring properties comparable to yours may be assessed at a lower per-unit amount, which violates the uniformity principle by which all assessments should be developed.
- The cost data used by the Assessor is misapplied and calculated inappropriately. The market sales are inaccurate or include the value of the business and equipment – not just the real estate. Income data is wrong or applied poorly.
- Equipment assets have been counted as real estate. In states where personal property is not taxed and given high computerization on the manufacturing floor, this can be a major source of over taxation.
- The assessment does not account for rightful economic obsolescence. This is especially important in our COVID-19 world. The economic outcomes of the pandemic on your business may affect how you rebuild the facility: perhaps smaller, built with different materials or with greater use of nontaxable robotics. Perhaps COVID-19 eliminated the need for certain parts of the facility, and a prospective buyer would not pay for what is unnecessary.
How to Appeal Assessments
Many tax reductions occur through informal discussions with the field appraiser before the new assessment is published. A neighborly approach backed by facts is typically the most effective way to proceed. Your points for reduction can be based upon:
- Correcting the property card record, eliminating improvements that are obsolete or retired, noting proper age, size or productivity.
- Comparing your assessment on a per-unit basis to those of similar nearby properties so that uniformity and fairness is argued.
- Correcting the record for assets, which should not be taxed for ad valorem purposes, such as intangibles, equipment or business enterprise value.
- Discussing the permanent effects of the pandemic on your business and the building occupied.
Throughout this process, we advise an attitude of cooperation toward the Assessor and representatives. Correcting the record, providing accurate data and reasoning appropriately allow the Assessor to help you without the cost of an appeal. An appraisal consultant that is paid per hour is extremely helpful in this process, and you keep the savings in the end.
If this approach does not result in a satisfactory reduction, file the appeal paperwork on time. A lawyer may be required to complete the forms. A hearing will be scheduled, and evidence presented. Often the Appeal Board will support the Assessor, but a reasonable settlement may be offered at this time. Recourse beyond the Appeal Board varies by jurisdiction, requires a lawyer in most cases, is time consuming and can be cost prohibitive for the reduction sought. Therefore, we recommend that you work with the field appraiser informally before the assessment is published.
Sikich is here to assist you on a non-contingency consulting basis. We have helped many taxpayers in the construction and real estate industry to significantly lower their obligation at minimal cost, while avoiding a lengthy and expensive appeal process. For immediate assistance, please contact Mary O’Connor.
