Look beyond value to ensure correct property tax assessment.
Many taxpayers pay close attention to property tax values, and rightfully so. Property owners can realize significant tax savings by successfully challenging excessive assessed values.
Yet taxpayers often overlook equally important assessment issues that can be costly if ignored. A prudent real estate investor always confirms that its real property is assessed correctly, meeting the local assessment authority's requirements and deadlines. That prudent investor also makes a point to understand the tax assessment consequences of any purchase, sale or improvement of real property.
Know Your Responsibilities
What can go wrong with an assessment, aside from the valuation? In one common scenario, a new property owner may miss the deadline to protest a property tax assessment because tax notices went to the previous owner. Having the property correctly assessed in the owner's name is usually necessary to receive copies of tax bills and valuation notices, so a buyer should confirm whether the first property tax bill and valuation notices after closing will be sent to the buyer or to the previous owner. A missed protest or payment deadline will not be excused because the new owner did not receive such notices, especially if the taxpayer failed to properly have the property assessed in its name.
In some jurisdictions, the buyer may need the seller's written authorization to file a value protest if the applicable valuation or lien date preceded closing of the sale. If that is the case, the buyer should obtain the necessary authorization, at closing if possible. The document should authorize the new owner to file the protest in the name of the seller if required.
As part of due diligence, the purchaser should understand how the property has been assessed in the past and what effect the purchase will have on its future assessment. Don't assume the assessment will be unaffected by the sale.
Here are several other property tax issues to consider when purchasing or developing real property:
- Is the sales price likely to affect the tax value?
- When does the tax authority send valuation notices, and when is the deadline to file a protest?
- Will the purchaser's use of the property constitute a usage change that will trigger a higher assessment?
- Is the property subject to exemptions or abatements? Will the new owner qualify for exemptions, and what are the required steps to secure them?
- Is the property tax proration calculated correctly? If based on an estimate, will the taxes be re-prorated to reflect the final tax bill?
- If part of a larger parcel, when will a new tax parcel be created? Who will pay the taxes until separate parcels are created?
- Are all of the existing improvements properly assessed, and if not, what is the risk of an escape assessment, or a retroactive correction in assessed value that may require the payment of back taxes?
- Does the state assess and tax construction work in progress?
A well-drafted contract can address some of these issues. For example, the contract may determine the party responsible for paying any rollback taxes based on the change in use, such as a change from agricultural use to retail.
If new construction occurs, the taxpayer should know of any legal requirements to have the improvements assessed. For instance, Alabama law requires the owner to assess any new improvements constructed during the preceding tax year. Failing to do so can add a 10 percent penalty to the tax value of the improvements. Further, the county assessor can go back up to five years and issue an escape assessment for the unassessed improvements, plus additional penalties and interest.
Personal Property
Real estate investors must also investigate the personal property assessment procedures in each state where they do business. Taxpayers should review personal property returns for accurate information, such as the acquisition date and cost. Regularly review the taxpayer's list of personal property to remove items sold or discarded before the valuation date. Timely file all exemptions, and review tax bills annually to confirm the benefit of any such exemption.
A prudent real estate investor must pay close attention to assessment requirements and procedures or risk unexpected taxes, penalties and interest, or missed opportunities to protest excessive property tax values. By consulting knowledgeable local professionals, an investor can ensure that its real and personal property are being correctly assessed and that the assessor has applied all exemptions or value adjustments.
