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Property Tax Resources

Feb
22

Snakes In The Property Tax Woodpile

Real estate acquisitions and improvements harbor traps for the unwary taxpayer.

Estimating the costs of purchasing or improving real proper ties may seem a simple exercise. However, tax traps await owners who are unaware of the dangers to avoid or otherwise veer off the trail. Prudent investors will be alert to the hidden tax snakes inherent in real estate decisions. Missteps taken at the time of purchase can lead to substantially higher property taxes later. To avoid these snakebites, the prudent investor will carefully research a property's existing tax treatment before closing, consider whether to execute an allocation engagement and ensure that the transaction is properly documented.


In some states, statutory caps limit valuation increases that would oth­erwise rise to reflect the market. For example, California's Proposition 13 limits increases in assessed value to 2 percent per year even if the property's market value is increasing at a faster rate, so long as ownership remains unchanged. Property owners should know that acquisitions and improve­ments can dramatically impact tax values that were previously limited by statutory caps.

In most states, acquisitions trigger reassessments at the next applicable valuation date. In researching existing tax values prior to purchase, prospec­tive buyers often research the taxing authority's online tax records. Online research may fail to distinguish be­tween capped or taxable value versus fair market value, however. If the ac­quisition removes the prior cap and the buyer estimates taxes based on the capped value rather than the fair market value, the new property owner could be in for a very rude awakening come tax time.  

Acquisitions can also change dead­lines for filing tax appeals in some ju­risdictions. For example, the normal filing deadline for appeals in South Carolina is January 15, but most coun­ty assessors will mail new assessment notices during the year following an acquisition. In those circumstances, the filing deadline is 90 days after the date of the reassessment notice.

Failure to take simple but essential steps in documenting a purchase can have substantial tax ramifications. For example, South Carolina law poten­tially exempts as much as 25 percent of a commercial property's purchase price from later ad valorem taxation, but only if the purchaser files for the exemption on or before January 30 fol­lowing the closing. Failure to file can cost purchasers tens of thousands of tax dollars or more. Yet many purchas­ers are unaware of this exemption un­til after they receive the new tax bill, when it is generally too late to file for the exemption.

Closing documents can increase future property tax bills. Many asses­sors calculate taxable value based on the consideration recited in a deed. Purchasers typically acquire income­ producing properties based on existing or potential cash flow.It is the com­bination of the real property, tangible personal property and intangible per­sonal property which generates that cash flow.

The deed consideration should re­flect only the value of the real property and improvements, not the total trans­action value. Similarly, title insurance should reflect the real property's value and exclude value attributable to tan­gible or intangible personal property. A well-thought-out allocation agreement potentially simplifies later record keep­ing and yields significant savings on income, property and transfer taxes, sometimes worth millions of dollars.

For example, operating hotels are generally sold as going concerns. That distinct from the underlying real es­tate. The hotel's intangible personal property, such as its brand, reserva­tion system or on-line presence, may substantially increase cash flow but is generally exempt from ad valorem tax­ation.Using the transaction's value, rather than the value of the real estate and improvements, in the deed not only increases documentary stamps but could lead to unwarranted higher ad valorem taxes.

Pre-purchase cost segregation stud­ies are often useful in documenting these separate values, but many pur­chasers and their lenders are reluctant to engage in this component analysis. For example, large hotel loans typical­ly proceed from a lender 's corporate loan department,not the real estate de­partment, and with good reason. Loan officers can be reluctant to explain to their superiors or to regulators why title insurance values might be lower than the face amount of the note, when the loan is really underwritten on the value of the cash flow and not the in­dividual components contributing to that cash flow. That reluctance could manifest itself in reduced loans being made available for borrowers.

Similarly, loans secured by retail real estate occupied by national credit ten­ants previously garnered less scrutiny from lenders and regulators in assessing loan risk. That laissez faire attitude may be changing as e-commerce erodes sales at brick-and-mortar stores, which continue to close in large numbers.

In some jurisdictions, changes in the property's condition such as a vacancy by a major retail tenant do not trigger a reassessment, and may not be factored into tax bills. The key inquiry in those situations is whether the change in condition occurred after the applicable valuation date.

Property improvements also cre­ate taxation pitfalls. In states that cap taxable property values, the caps may come off when improvements are made. In other words, the cost of im­provements could include not only construction expenses but also a substantially greater tax burden.

The effect of improvements on prop­erty taxes varies by jurisdiction. Flor­ida has adopted a bright-line test that examines whether the completed improvement increases value by at least 25 percent. California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not convert the property to a state "substantially equivalent to new." Whether new construction or improvements fall into this category is "a factual deter­mination that must be made on a case­ by-case basis," the California statute states. South Carolina law contains no such guidance.

Timing also matters. Most jurisdic­tions prohibit taxing improvements until after the improvements are com­pleted, as defined by applicable stat­ute. If the applicable valuation date is Dec. 31, 2018, an owner might consider delaying completion until after Jan. 1,2019, to delay a major tax increase. Re­gardless, careful analysis and plannirig can help property owners address the hidden cost of increased taxes.With careful planning, the prudent property owner can avoid being bit­ten by the lurking snake of increased property taxes and walk the property tax trail with confidence.

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Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Bond Dickinson LLP. The firm is the South Carolina member of the 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.
Jan
01

South Carolina Property Tax Updates

Updated June 2011

South Carolina Enacts New Point of Sale Law

On June 14, 2011, Governor Nikki Haley signed a new law significantly amending South Carolina's controversial "point of sale" law requiring tax reassessment of properties whenever a sale has occurred. The prior law adopted in 2006, commonly known as "Act 388," placed a fifteen (15%) percent cap on reassessed values as part of the five (5) year countywide reassessment programs but sought to make up for the loss of revenue by requiring that properties be reassessed whenever there is a change of ownership.

Many in the commercial real estate market had expressed that Act 388 placed buyers of commercial properties at a significant competitive disadvantage with competitive properties whose property taxes had not increased. The new law, which does not apply to owner occupied residential properties, creates an exemption equal to twenty-five (25%) percent of any increase in valuation resulting from a change in ownership. The exemption does not permit a reduction in market value below the prior assessed value.

The new legislation leaves several important legal arguments unresolved, most notably the date of valuation for property owners whose properties have decreased in value during the middle of the countywide reassessment cycle. Although the current law calculates property taxes based on the state of the property as of December 31st of the prior year, the South Carolina Attorney General's Office issued an advisory opinion in June 2010 stating that the valuation for any mid-cycle appeal was to refer back to date of the last countywide reassessment. Many South Carolina counties are not adhering to this advisory opinion. The new legislation does not address this issue.

Morris A. Ellison
William T. Dawson
Womble Carlyle
American Property Tax Counsel (APTC)

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Dec
18

South Carolina Taxpayers Play 'Dating Game'

Inconsistencies and confusion reign in determining effective date for valuing commercial properties.

"The practical implementation of the mandated five-year county-wide reassessment program further compounds the dating confusion. Many counties delay county-wide reassessment for one year, as authorized by statute, and in some cases, two years..."

Commercial property owners in South Carolina already faced an unsettled and confusing issue in trying to determine he valuation date for ad valorem taxes. Now, the South Carolina Court of Appeals has further complicated the issue.

Determining the valuation date should be simple: South Carolina law states the pertinent date of value for a given tax year is Dec. 31 of the preceding year. For example, logic suggests the valuation date for 2013 property taxes hould be Dec. 31, 2012. But that logic is often mistaken. South Carolina statutes require local assessors to engage in a countywide reassessment every five years. The process is referred to as an "equalization and reassessment program," and is intended to equalize the tax burden on property owners. Logic suggests the equalization program will equalize values, but that logic is also mistaken.

Act No. 388 and its Wake

Approximately seven years ago, the South Carolina General Assembly passed Act No. 388 which, among other things, capped value increases resulting from a county-wide equalization and reassessment to 15 percent of the property's prior assessed value, so long as the property had not changed hands in the past five years. However well-intentioned, the effort to lower property tax burdens wrought havoc with the concept of equalization.

The legislature also created the concept of an assessable transfer of interest, which eliminated the cap in some situations, such as in certain transfers of interest within the ownership entity, or following construction of improvements. In a sense, the legislation penalizes a landowner from a tax standpoint for improving a property's economic performance with new construction.

By their nature, caps erode the principal of uniformity since taxes for some properties go uncapped. Competing properties may have identical uses and financial performance, but taxes may be capped on one property, but not on the other. Under Act No. 388, two economically identical properties could be taxed using different valuation dates.
In fact, Act No. 388 promulgates a potential for four alternative valuation dates.

In an effort to address some of the outcry over the inequality engendered by Act No. 388, the legislature in 2012 provided an exemption of up to 25 percent of the purchase price of commercial properties. Unfortunately, this provision adds yet another little-known filing deadline, since the application for the exemption is due on or before Jan. 31 of the applicable tax year. In other words, a property purchaser must file for this exemption prior to the first Jan. 31 after acquisition. Failure to do so likely invalidates the exemption.

The practical implementation of the mandated five-year county-wide reassessment program further compounds the dating confusion. Many counties delay county-wide reassessment for one year, as authorized by statute, and in some cases, two years. For example, after delaying a scheduled 2004 reassessment to 2005, Charleston County delayed its next scheduled county-wide reassessment from 2010 to 2011 and decided to use a Dec. 31, 2008 valuation date rather than Dec. 31, 2010. The question is what date to use for valuation in the county-wide reassessment. Should it be the date on which reassessment was scheduled to occur or Dec. 31 of the year prior to implementation?
The correct answer is unclear.

Interim Appeals Defy Logic

So, what happens if a property owner wants to appeal the value of a property in the middle of the fiveyear period because of a change in economic performance? For example, is it fair to tax a property based on its economic status as of the valuation date used in the last county-wide reassessment, when it may have lost its anchor tenants since then? Logic and the clear language of state statutes suggest the valuation date should be the lien date, or Dec. 31 of the year prior to the year in which taxes are due, in order to treat properties equally based on economic performance.

According to the South Carolina Attorney General, however, that logic again would be wrong. In 2010, the attorney general opined that county assessors should ignore the unambiguous statutory language regarding valuation date and use the effective date of the last county-wide reassessment. County assessors are implementing this opinion regardless of logic.

In the 2013 case of Charleston County Assessor vs. LMP Properties, the South Carolina Court of Appeals further complicated the dating problem. In this case, the parties agreed to a Dec. 31, 2003, value date because 2004 was the date of the county's last county-wide reassessment. However, the Court determined Dec. 31, 2007, was the proper date for determining the property's highest and best use. In other words, the Court held an appraiser should use one date to determine the property's value and a different date to determine the property's highest and best use. How licensed appraisers meet these requirements and satisfy professional standards under the Uniform Systems of Professional Appraisal Practice defies logic. Logic suggests that assessors should use a uniform date, the lien date, for valuing real property. Logic also suggests the property's economic performance as of the lien date should control for interim appeals. But, then again, whoever said that dating — in love or taxes — had to
be logical?

ellison mMorris A. Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris A. Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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