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Look Beyond Price to Cut Property Taxes

The Purchase amount isn't necessarily a valid proxy for taxable value.

Multifamily Property owners and Appraisers are often creatures of habit. They generally calculate a property's value for tax purposes the same way they do for an investment. If an apartment complex recently traded for 10 million, the buyer's appraiser may reason that the property would be assessed at $10 million for taxation purposes.

This line of thinking is particularly common in states that use market value as the standard and where the purchase price was based on an appraisal. While this approach might be reasonable for budgeting worst-case tax accruals, such thinking could result in missed opportunities to reduce the actual tax burden on the property.

PERMISSIBLE APPROACHES TO VALUATION VARY

There are several reasons a property's investment value, or even its market value, might differ from its value for tax purposes. Such considerations include whether the acquisition or investment value includes non-real estate items such as personal property, or intangibles such as long-term leases. Taxpayers should closely examine all of those issues to ensure that only taxable property is being assessed (and, then, at the correct value).

There's another,often-overlooked dimension of savings available to many taxpayers, in the form of seemingly hidden tax benefits conferred by statute. Indiana, for example, has a number of assessment statutes that dictate specific approaches to determining taxable value, depending on the type of property at issue. One property type receiving this unusual valuation treatment is apartment or multifamily rental properties.

Even as investors continue to bid up asking prices in the marketplace, Indiana law requires apartments to be assessed at the lowest valuation determined by applying the three standard approaches to valuation: cost, sales comparison, and income. This means owners and appraisers would miss the mark in estimating the taxable value of apartments or multifamily rental proper­ties if they applied only the typical approaches used to evaluate a property's investment value or market value.

The Indiana Board of Tax Review has issued several decisions confirming this mandate. One such case, Merrillville Lakes DE LLC v. Lake County Assessor, involved a taxpayer challenging his 2010-2014 assessments for an apartment complex in Merrillville, Ind. Both the assessor and the taxpayer presented appraisals at the administrative hearing, but only the taxpayer relied on the specific apartment-valuation statute to develop his opinion of taxable value. The board rejected the assessor's appraisal.

Based on the statutory code and the appraisal in the Merrillville Lakes case, the Indiana Board of Tax Review ultimately lowered the assessed value of the apartment complex for each contested year based on the taxpayer's cost analyses. Because the statute dictates that the lowest of three approaches determines the tax value, even if the owner had purchased the property for far more than the cost-approach indication of value, the board couldn't have increased the value to the higher sales price.

DUE DILIGENCE CAN YIELD SAVINGS

While it may seem like common sense to assume that a property's purchase price is a valid proxy for its taxable value, as the Indiana ruling shows, that's not always the case. A little due diligence could result in a lower valuation and, with that, significant savings.

David A. Suess is a partner in the Indianapolis office of the law firm Faegre Baker Daniels, the Indiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
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