A short guide to the complex world of US property taxes

Altus Group’s recent webcast, Property Tax 101, was curated with a simple purpose – help professionals in commercial real estate better understand the complexities of taxes on real property and personal property in the US.

Tapping into the expertise of Senior Manager Angela Kirk, Director Erin Stache and Senior Director Rob Unkle, the webcast gave attendees the opportunity to be active participants by answering a variety of questions about their experience with taxes while clarifying key definitions, details pertaining to the assessment process, and more. The first question posed during the webinar asked listeners to rate their experience with property taxes, from very limited to very familiar. Most were familiar, but said they could always learn more.

The second question aimed to uncover the aspects of property taxes which listeners felt least confident about, including tax appeals/valuing property, filing personal property returns, ensuring accuracy of Property Tax billings, and property tax accounting (accruals, budgets, forecasts, etc.). “All of the above”, was the most popular selection amongst respondents.

Figure 1 - Results from poll question : As it relates to property tax, what do you think you know least about?

Listeners were also prompted with the question of how much property tax work they outsource. Interestingly, selections were split somewhat evenly across all three approaches, with 36.14% respondents revealing that they do all their property tax work in house, 28.31% limiting the functions they outsource, and 26.51% noting that they outsource a majority of their property tax work.

Figure 2 - Results from poll question : How much of your property tax functions are outsourced to providers?

Real vs. personal property

The panelists noted that real estate – or real property – generally refers to the physical parcel of land, plus improvements to the land such as clearing and grading, as well as improvements attached to land such as paving, buildings and structures.

Business personal property, on the other hand, is any property owned by a business that isn't “real property”. To understand the difference between real property and personal property, imagine you were to take a building, turn it upside down, and shake it. Anything that would fall from the floor to the ceiling would be considered personal property. Examples in a business might be office furniture or product inventory. Anything that is attached to the building, such as plumbing fixtures or solar panels, would be considered real property.

Every state in the US taxes real property, but only 38 of 50 states (and DC) levy taxes on business personal property. Across the US, both real and personal property taxes are determined on an “ad valorem” basis, or “according to value”. Each state’s property tax legislation defines “market value” slightly differently, but it is usually some version of the following:

Market value is the most probable price for an asset, as of a specified date, in cash or in terms equivalent to cash at a reasonable exposure in a competitive market, with both buyer and seller acting prudently in their self-interest, with neither under undue duress.

The “specified date” is the effective valuation date, or lien date, set out in state legislation for property tax. It is often Jan 1 of the taxation year, but can be any month or year, and sometimes a year or more in the past.

The “market value” determined by the government assessors or appraisers is referred to as the “assessed value”.

Determining assessed values

The panelists noted that assessors use mass appraisal techniques to value property. In mass appraisal, data is gathered and analyzed for a group of properties, and values are determined using standardized methods and statistical testing. Mass appraisal is rooted in the three traditional approaches to value:

• The income approach calculates value based on the income the property generates

• The sales comparison approach determines value based on recent sale prices of other comparable properties with similar characteristics

• The cost approach estimates value based on the replacement cost of a similar building, less depreciation

To apply the income approach, the assessor first calculates operating income and then deducts normalized vacancy and occupancy costs to determine net operating income (NOI). A capitalization rate is applied to the NOI to estimate value. Assessors determine capitalization rates based on analysis of sales or using published reports. The income approach is used to value most multi-tenanted properties, such as shopping centers, office buildings and apartments.

The sales comparison approach predicts value based on recent sales of comparable properties. To equate the comparable sales to the subject, the assessor must adjust for the time between the sale date and the legislated valuation date, in addition to differences in location, quality, physical condition or other attributes. The sales comparison approach is most accurate when there is a large volume of sales of highly similar properties. Properties typically valued using the sales comparison approach include vacant land, subdivision homes and condominiums.

The replacement cost approach to valuation depends on the concept that a buyer will pay no more for a property than the cost to construct a property of similar utility.

Estimating replacement cost can be a complex matter, involving component cost manuals, index factors, geographic multipliers, and other data. Further complicating the cost approach is the estimate of the costs associated with all forms of depreciation, which include physical, functional, and external/economic. The cost approach is typically used to value personal property, as well as special-purpose properties like health care facilities and data centers.

The property tax cycle

To take control of property tax costs, it is important to be aware of the property tax cycle and the relevant dates for all properties in your portfolio. The cycle includes personal property returns, assessor collection of data, notice of assessment, reviews, appeals and litigation, tax bills and tax refunds.

In the US, some states manage the assessment process at the state level, and some at the county or city level. For personal property, the business owner files an annual return indicating the value of all personal property in the jurisdiction as of the “lien date”. For real property, the assessment jurisdiction determines the value of property as of the “valuation day”, which might occur each year or every few years. In many cases, the property owner will not receive a notice of assessment unless the value changes. It’s also important to know that personal property tax returns may be audited. In some instances, the taxing authority will audit the calculation of personal property value – sometimes at inopportune times during the year. Some states will audit cyclically, other states audit at random, and some won't audit at all. Regardless of your respective state's procedures, audits are a real possibility, so it's imperative to keep your documentation current. Business owners also have the ability to appeal personal property assessments, as in many cases the values indicated by cost and depreciation tables may be out of line with market values.

In most districts, real property assessments can be appealed each year. Appeal processes and deadlines are printed on the assessment notice; however, you may not receive a notice if the value has not changed, so it’s imperative to be aware of the deadlines in your property’s jurisdiction. Some regions allow only a few weeks to appeal, while others provide a 60-day window.

The processes to challenge an assessment vary by state. Most jurisdictions allow for an informal review of the assessed value with the assessing authority, prior to the appeal deadline. An appeal is a formal challenge of the assessment, which is usually heard by an appointed tribunal. Members of these tribunals often have no formal training in real estate valuation. If neither the review nor the appeal result is satisfactory, you may have the opportunity to proceed to litigation before the court.

Tax bills are often issued after the appeal deadline has passed. Since an appeal is the only way to impact the amount of property tax you pay, it is important to review the accuracy and equity of your assessed value before the appeal deadline. In today’s volatile market, a property tax appeal can have a significant positive impact on your bottom line, and so it is more important than ever to be aware of the process and deadlines. As noted by the panelists at Altus Property Tax 101 webinar – property taxes can be a long, complicated process that requires pristine record keeping and, oftentimes, the assistance of a tax professional.