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Property Tax Resources

Nov
22

Industrial Property Tax Gets Personal

Differentiate personal property from real estate values for fair tax treatment.

North Carolina taxes both real estate and personal property, but differing valuation schedules and processes for the two types can lead to confusion and inflated tax bills for industrial property owners. Understanding how assessors value industrial properties can help those taxpayers detect issues and contest unfair assessments.

Dual processes

North Carolina requires assessors to revalue real property at least every eight years. The value as of Jan. 1 of the valuation year then remains constant until the next valuation, unless specified changes in the property occur to trigger a change in the assessment. Many counties revalue every four years, and a few, even more frequently.

Assessors use a market analysis to determine real property's taxable or fair market value. This involves applying one or more of the three valuation approaches: cost, comparable sales, or income.

The state requires annual valuation of personal property based on installed cost, which is subject to the applicable trending and depreciation schedules. For the most part, taxing authorities rely on the taxpayer's annual business personal property listing to determine what items of personal property are present, the installed cost, and the trending and depreciation schedule applied. The counties follow schedules for auditing the property tax listings, and most disputes that arise stem from these audits.

With industrial real estate, the two tax schemes can create conflicts based on property components that could be considered either real estate or personal property, depending on circumstances. For example, reinforced foundations or specialized wiring for unique machinery could be considered a real estate improvement, thereby adding value to the real estate, or they could be considered personal property subject to depreciation and trending.

Although the tax rate applied is the same for both real estate and personal property, categorization can significantly affect taxable value. Real property improvements enhance market value on a more permanent basis, while personal property value is generally presumed to decline because of annual trending and depreciation.

And of course, no one wants to be taxed twice on the same property: once by having a component or improvement included in the real estate value, and again by having it taxed as personal property.

Defining characteristics

How can a taxpayer determine what is real and what is personal in their industrial property? Generally, personal property items are movable and not permanently affixed to real estate. An issue of intent arises, however, if the item can be removed but not without causing serious damage to the real estate.

A rule of thumb in the North Carolina Department of Revenue's Personal Property Appraisal and Assessment Manual instructs assessors to classify all property and investment necessary for the operation of machinery and equipment as personal. Examples are wiring, venting, flooring, special climate control, conveyors, boilers and furnaces, dock levelers, and equipment foundations. Stated another way, property used as part of a process, or that is in place to support equipment, is generally personal property.

On the other hand, Department of Revenue staff regard items in the plant for lighting, air handling and plumbing for human comfort to be part of the real estate. The department's appraisal and assessment manual includes an extensive chart, and each county's published schedule of values may also provide a helpful listing.

It is often difficult to know whether the county has included what could be classified as personal property in its calculation of real property value. Regardless, if the taxpayer has not listed such items on the annual personal property submissions, it will be difficult to argue after the fact that they should have been excluded from the real estate value.

Taxpayer strategies

Taxpayers can argue for a reduced assessment by identifying personal property items improperly classified as real property in the assessor's calculations and seeking to have them treated as personal property subject to trending and depreciation. Knowing where to look for personal items will help the property owner in this task.

A critical item to be generally classified as personal property is any leasehold improvement. Leasehold improvements often look like real estate but are owned and controlled by the tenant for the lease term. These are items the tenant paid for and received under terms of the lease or other contract, and were installed for the tenant's use. Leasehold items almost always facilitate the tenant's business.

In deciding whether these items are real or personal property, the taxing authority will apply a test akin to a traditional fixture analysis, determining the manner of affixation, whether the item can be removed without serious damage, and whether it is intended to remain permanent. In the end, the assessor will apply a "totality of the circumstances" test, including the lease terms.

The tenant - as the owner of the leasehold improvements - is required to list those items as personal property. The landlord should monitor the tenant's personal property submissions to ensure that all tenant improvements are being listed. This will help to avoid leasehold items being considered as part of the current real estate valuation.

Unlike a traditional fixture analysis, and dependent on the lease terms, the improvements may be taxed to the tenant during the term of the lease. When the improvements are left to the landlord at the end of the lease term, the taxing authority will need to consider assigning any remaining value to the real estate.

The owner of an industrial property needs to be cognizant of how the assessor is valuing both the real estate and personal property, and how those components are taxed. This requires knowing what improvements are included in the valuation of the real property as of the valuation date, and tracking the annual personal property tax listings, especially those submitted by a tenant. Finally, taxpayers must be timely in correcting any erroneous assumptions or listings.

Gib Laite is a partner in the law firm Williams Mullen, the North Carolina member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
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Dec
20

Tough Burden of Proof in Tarheel State

Owners in North Carolina must satisfy legal tests in arguments for reduced taxable valuations.

   Notice of a commercial property's revaluation to an increased taxable value can deliver a shock to the taxpayer. Although actual tax liability will depend on the completed valuation, new budgets and a tax rate that is still to be set, the taxpayer fears that an inflated value will result in an unfairly high property tax bill.
The typical taxpayer response is to assert the new value is too high, particularly for the larger assessment increases. The assertion alone, however, is not enough to change the valuation. While many jurisdictions have different burden of proof statutes, under North Carolina law, the onus is on taxpayers to prove specific criteria meriting a reduced assessment.
   Unfortunately, the state's valuation practices set the stage for assessor mistakes and inaccurate valuations. Unlike many jurisdictions, North Carolina only requires that real property subject to taxation be revalued every eight years, although recently most counties have opted to revalue every four years. In light of dramatic property value swings over the past decade or two, however, these lengthy gaps between valuations often result in significant increases, with assessments spiking by as much
as 40 percent.
   Undertaking a county-wide real property revaluation is a behemoth project for any taxing authority. Countless hours of factual investigation, analysis, and number crunching go into the process. Those involved are performing a necessary public function and do their best to get it right.
   Given the scope of a revaluation, lawmakers have set limitations to discourage taxpayers that simply disagree with the new assessment from demanding a full appeal and hearing based solely on the merits of the value. Aside from the time deadlines in the appeal process, a significant governor on the appeal process in North Carolina is the burden of proof.

Proof vs. persuasion
    In North Carolina, tax assessments are presumed correct. The State Supreme Court spelled out this premise in a 1975 case involving AMP Inc.'s appeal of the taxable valuation assessed on inventory stored at a Greensboro facility.
    In finding that AMP failed to prove its case, the Court encapsulated the burden of proof when a taxpayer attempts
to rebut the presumed correctness of an assessment. This is a presumption of fact that may be rebutted by producing evidence that tends to show that both an arbitrary or illegal method of valuation was used and that the assessment substantially exceeded the true value of the property.
    A taxpayer appealing an assessment must come forward with evidence tending to show both of these conditions: that the method used to establish the assessed value was wrong, and that the value derived from that method was substantially greater than the true value (the assessed value was unreasonably high).
   The burden is not one of persuasion but one of production. In layman's terms, the burden is not to persuade the decision maker that the taxpayer's opinion of value is correct and the assessor's is wrong. Rather, the taxpayer must show simply that there is evidence both that the assessor used an incorrect method in its appraisal, and that the resulting value is substantially greater than it should be.
   Once the taxpayer has produced evidence to rebut the presumption of correctness, the burden of coming forward with evidence shifts to the county. The assessing entity must establish that its method did, in fact, produce true value; that the assessed value is not substantially higher than called for by the statutory formula; and that it is reasonable. The latter is a burden of persuasion, meaning the assessor must convince the decision maker that it applied a correct method and arrived at true value.
   The terms "arbitrary" and "illegal," which the Court used in AMP in referring to the taxpayer's burden of showing the assessor used an improper method, sound a bit harsher than they need be. The courts simply hold that a property valuation methodology is arbitrary or illegal if it fails to produce "true value" as defined by tax law in General Statute 105, Section 283. That section defines true value as meaning market value. Market value is the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used."
    A variety of methods have been found to be illegal or arbitrary, such as failing to consider the effect of obsolescence in the face of testimony of obsolescence and relying only on the cost approach to value income-producing property. A tax professional will be knowledgeable of many other examples.
   Given the burdens inherent in challenging assessments, a taxpayer planning to appeal its assessed value needs to be prepared to assemble and present information supporting its value opinion. In addition, the taxpayer should obtain and understand the taxing authority's method of arriving at the assessed value, in order to challenge that method as may be appropriate.
   At the local level, taxpayers have traditionally focused arguments on value alone, but, as an appeal reaches higher levels, the burden can become a critical evidentiary obstacle to overcome. Failure to get over this initial hurdle can result in dismissal of the appeal without the actual assessed value being considered on its merits.

Gib Laite is a partner in the law firm Williams Mullen, the North Carolina member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
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