Property Tax Planning Delivers Major Savings
When it comes to property taxes, what you don’t know can hurt you. Whether it is failing to meet a valuation protest deadline, ignorance of available exemptions or perhaps missing an error in the assessment records, an oversight can cost a taxpayer dearly. Understanding common mistakes — and consulting with local property tax professionals — can help owners avoid the pain of unnecessarily high property tax bills.
Think ahead on property taxes
Many owners ignore property taxes until a valuation notice or tax bill arrives, but paying attention to tax considerations at other times can greatly benefit a taxpayer. For example, it’s good practice to ask the following questions before purchasing real estate, starting a project or receiving a tax bill.
Does the property qualify for exemptions or incentives? Every state offers some form of property tax exemptions to specific taxpayers and property types. Examples include those for residential homesteads, charitable activities by some nonprofits and exemptions for pollution control equipment. Similarly, governments use partial or full property tax abatements in their incentive programs for enticing businesses to expand or relocate to their communities. While many of these programs are industry-specific, it is important to consider all of the taxpayer’s potential resources as well as the costs and benefits of pursuing each.
In most cases, a taxpayer must claim an exemption or obtain an abatement in order to receive its benefits. Failing to timely do so may lead to the forfeiture of an applicable exemption. If the taxpayer becomes aware after the deadline that it may have qualified for an exemption, it is still prudent to speak with a local professional. Once the exemption is in place, review the assessment each year to ensure it is properly applied. Additionally, taxpayers and their representatives should closely follow legislative action affecting the exemptions that may be available.
How will a sale or redevelopment affect the property’s tax value? For instance, will the sale trigger a mandatory reassessment or perhaps remove a statutory value cap? If a change in use removes an exemption, will it trigger rollback taxes or liability equal to the amount of taxes previously excused under the exemption? Will the benefit of an existing exemption be lost for the following tax year? Taxpayers that fail to ask these questions risk underestimating their tax bill, which can quickly undermine an initial valuation analysis and actual return.
Learn whether the purchaser or developer must disclose the sales price or loan amount on the deed or other recorded instruments. If so, avoid overstating the sales price by including personal property, intangible assets or other deductible non-real estate items. Assessors often use deed and mortgage records in determining or supporting assessed value, and it can be an uphill battle trying to argue later why a disclosed sales figure is not the real purchase price.
Don’t assume, without further inquiry, that the tax value will stay unchanged following a sale; nor that it will automatically increase or decrease to the purchase price. In determining market value, the assessor may consider (or disregard) the sale in a variety of ways depending on the jurisdiction, transaction timing, arm’s length condition and other factors.
Perhaps the assessor will change their cost approach assumptions to chase a higher purchase price, or disregard a lower sales price suspected of being a distressed transaction. A local, knowledgeable advisor can help the taxpayer set reasonable expectations for future assessments following a sale or redevelopment.
Plan to review and challenge assessments promptly
Before the valuation notice or tax bill arrives, make a plan to review it and challenge any incorrect assessments within the time allowed. An advocate who thoroughly understands local assessment methodologies and appeal procedures can be invaluable in helping to craft and execute a response strategy.
The first hurdle in any property tax protest is learning the applicable deadlines. This can be more difficult than it appears, as local laws don’t always require a valuation notice. For instance, some states omit sending notices if the value did not increase from the prior year. Additionally, many states reassess on a less-than-annual basis, although there may be different periods within the reassessment cycle in which appeals can be filed.
It is critical to understand the reassessment cycle and protest periods in every jurisdiction in which a taxpayer owns property. Missing a deadline or required tax payment can result in the dismissal of a valuation appeal regardless of its merits.
The owner or their agent should understand not only appraisal methodology but also legal requirements governing the assessor. Is there a state-prescribed manual that dictates the application of the cost approach? Does the assessor use a market income approach to value certain property types?
In some jurisdictions, assessors reject the income approach to value if the owner fails to submit income information by a specific date. In others, submitting income information may be mandatory.
With mass appraisal, assessors often make mistakes that will go undetected if not discovered by the taxpayer’s team. Has the assessor’s cost approach used the correct building or industry classification, effective age of improvements, square footage, type of materials, number of plumbing fixtures, ceiling height, type of HVAC system, etc.?
Even one small error could skew the final value and should be timely brought to the assessor’s attention, whether or not in a formal protest setting. In addition to correcting the error for future assessments, the owner should determine whether it is entitled to a refund for previous taxes paid and, if so, timely file any refund petitions.
With countless jurisdictions and varying assessment statutes, it is unreasonable to expect a property owner to master property tax law. Yet with proper planning and local advisors, taxpayers can avoid pitfalls they may have otherwise overlooked.
Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC, the Alabama member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at [email protected].