Monitoring Property Tax Assessments
What steps you can take to appeal an assessment when needed.February 3, 2011
by Allen Liebnick, CPA, CFF
Property taxes are a significant source of revenue for state and local governmental entities across the country. With the recent declining market conditions and growing budget deficits, the taxing entities are pressured to maintain the tax basis to help fund local schools and other dependent entities. Governmental cutbacks are inevitable considering the havoc the recession has had on the local city and county tax base. It is therefore critical to monitor your property tax assessments closely to ensure that they are reflective of current market value. This includes both real property as well as personal property used in the production of income.
How Does It Affect Your Tax Assessment?
With the headlines screaming that real estate values are down 10 percent, 20 percent or even 50 percent in some parts of the country, Kevin Cavasos, director of property taxes and fixed assets at the Dallas/Fort Worth-based boutique expense recovery and tax savings consulting firm CTMI, LLC, said that you really need to ask, "Are these declines being accounted for in your property tax assessments?"
It isn't just real estate values that are down, but personal property as well whose values can fluctuate as much as or more than real estate prices. For example, Cavasos noted that with the number of scaled-back or closed businesses, the glut of used office furniture on the market has had a drastic impact on the value of office furniture.
How Do Appraisal Districts and Tax Assessors Arrive at Their Assessments?
Although the appraisal districts and tax assessors have made great advances in their technology and are far more sophisticated than in the past, they still must rely on mass appraisal techniques. Mass appraisal involves grouping similar property "types" and placing a value on each. Considering that every square foot of land and buildings within a county must have a value, appraisal districts are faced with a tremendous task of accurately appraising each property. The appraiser under this approach may not be aware of specific characteristics of a property that can either enhance or diminish the value of the property.
Steps You Can Take to Review Values Assessed
While each state defines assessed value differently, most are tied to the current market value, which is the price an asset would sell for on the open market. For real property, ensure that the value assessed on your property takes into consideration the changing economic conditions reflective in the rental rates, occupancy levels or capitalization rates in your particular market. For personal property, confirm that the value assessed on your property takes into consideration other factors such as basic supply and demand forces (such as the overabundance of used office furniture that has diminished the value of your own office furniture), technologically outdated equipment (such as computers, laptops that will no longer support new operating systems or programs) or substantial wear and tear. Cavasos said that a drop in equipment value can come about for a manufacturing plant that is operating at less than capacity due to declining product demand or negative utilization rates resulting from outdated equipment. Other items that are often incorrectly included in an assessment are intangible items such as software, goodwill, warranties and installation costs. You should be aware of the many exemptions available for both inventory and assets and carefully evaluate and review them.
Appealing an Assessment
The most effective approach to reducing your assessment is to work with the appraisal districts on an informal basis long before the scheduled Board hearing. Oftentimes, with proper documentation to support the taxpayer's opinion of value, the appeal can be resolved without further action. Documentation details of a comparable property that has recently sold or evidence to support the rental rates is critical even in an appraisal and especially for a successful appeal. The tax assessor must have support when the value the taxpayer is seeking falls outside the range of other properties within the area.
Another area to consider is equalization. Even though a property is valued at current market value, in many states the assessment must be equal and uniform with similar property. For example, suppose an office building is being assessed at $100 per square foot because there is a recent arms-length purchase of the building. A valid argument can be used that other comparable properties are being assessed at $80 per square foot. Because the purchaser may have paid a premium doesn't necessarily mean he should be assessed at that higher value.
Cavasos emphasized that the appeal process is very time sensitive and that caution must be taken to ensure items are filed timely. Generally, you have 30 days to file an appeal after the valuation notification has been received from the tax assessor. It's during this time period that the assessor should be contacted and provided any information to substantiate your position. If an informal agreement is not reached, the appeal must be filed before the deadline to keep the window of opportunity open. A formal board hearing will then be scheduled.
Benefits From an Appeal
It's fairly obvious that any company required to pay property taxes stands to benefit from a successful appeal resulting in reduced taxes. There are, however, certain industries that benefit more than others. All asset- or inventory-intensive companies such as manufacturers or distributors are ideal candidates. Industries dependent upon real estate like retailers, restaurant or hospitality also have high returns.
The savings vary but can be substantial. When considering that the effective property tax rates in most states vary from 1.5 percent to three percent of the market value of a company's real and personal property, a five percent or 10 percent decline in the market conditions can have a great impact.
There are tax consultants available to evaluate your firm's property tax assessments and represent you through the appeal process if needed.
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Allen M. Liebnick, CPA CFF, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 18 years. He serves clients in the U.S., Canada and Mexico. He is a member of the New York State Society of Certified Public Accountants as well as Texas Society of Certified Public Accountants. Liebnick is the current Chair of the Texas State Society of CPAs State Tax Conference. Liebnick thanks Kevin Cavasos for participating in this article. Corporate Finance Insider readers who have questions for him can contact him directly via e-mail at Kevin Cavasos. Tell him Allen sent you.