United States: Valuable Commercial And Residential Real Estate Property Tax Tips

Last Updated: October 2 2015
Article by Jeffry Bernstein

Yes, it is possible to save hundreds of thousands of dollars per year on your commercial real estate property taxes!  All it takes is a little planning and prompt, timely action for property owners to significantly reduce their property tax burden.  In the following discussion, we will address the importance of planning and filing your appeals early, planning business transactions, such as changes of ownership, to minimize your tax consequences and other important tips that every commercial and residential real estate owner should know.

Plan To File Your Valuation Appeals In A Timely Manner

The most valuable advice that we can give our clients is to FILE VALUATION APPEALS IN A TIMELY MANNER.  The deadline for filing appeals is sometimes extraordinarily brief.  For example, if you wait to receive your tax bill, the time for appealing the valuation has oftentimes already expired.  Therefore, it is important to plan in advance, especially since rules and forms vary between counties.  Here are some important considerations when appealing:

  • File Prop 8 Appeals by September 15th (or November 30 depending on the County) of Each Year. If you fail to file a so called Prop 8 Appeal contesting the valuation for a particular tax year on time (between July 2 and September 15 or November 30 for some counties), you cannot obtain a tax refund for that year even though your property has declined in value.  The reduction in value only applies to that particular year.  Some counties (e.g., San Francisco) send out a statement in July showing the assessed value for the fiscal year beginning July 1, but many counties do not.  It is very important to plan in advance for filing your appeal, especially if you anticipate that your property has significantly declined in value, as discussed below.
  • File Supplemental and Escape Appeals Within 60 Days of Notice. In many situations, the clock starts ticking from the date that the Assessor or Tax Collector issues its notice, even if not mailed on that date.  These notices are typically issued when property has been sold, a "change of ownership" (as discussed below) has occurred, new construction is completed, or when the Assessor realizes that something was missed or an erroneous exemption occurs.  Since these notices can show up at any time, you should prioritize your response and act swiftly in filing your Appeal.
  • File an Appeal to Seek Correction of Base Year Value Promptly. A property's base year value can be reassessed upon a "change of ownership" or after new construction.  While you technically have four years to file an Appeal, you are not entitled to a tax refund for any tax year in which you failed to file a timely Appeal, even if you are ultimately successful as to the base year value.  Therefore, for the Appeal to retain its maximum value to you, it is important to act quickly when you receive the supplemental or base year notice.

Overall, the Assessment Appeals process includes a hearing before an administrative tribunal (akin to a mini-trial), and it is a good idea to have competent legal representation (and a competent appraiser).  Your attorney should be involved as early as possible to assist you in planning for and filing your Appeals, gathering evidence, conducting negotiations for a Stipulated Assessment, and/or for litigating your Appeal.  Although exchanges of information with the Assessor are provided for, there are otherwise no discovery proceedings such as depositions or interrogatories.  Oftentimes, the benefits of a successful Appeal and the resulting valuation may carry over for several years.

Identify A Reduction In Your Property Value

Every owner of commercial and residential real estate should know how their property is valued, and when it changes in value.  It is a worthwhile investment to consult with a professional appraiser so that you can understand the method of valuation of your property and can compare it with its assessed value.  If the value of the property has declined below the assessed value, then you should be sure to file your Prop 8 Appeal in a timely fashion (between July 2 and September 15 or November 30 for some counties). Here are some common situations that may signal a potential decrease in property value:

  • Loss of a major tenant, especially an anchor tenant in a shopping mall
  • Prolonged vacancy of space
  • Decline in revenue
  • Decline in rents for new leases
  • Decline in sales prices of comparable properties
  • Decline in economic market conditions, such as a rise in interest rates or change in capitalization rates

Be Alert For A "Change Of Ownership"

A "change of ownership" is a technical, legal term that triggers a reassessment and is a potential trap for the unwary.  Many property owners do not realize that a "change of ownership" can occur in circumstances where there is no apparent purchase or sale of property, such as a transfer of ownership within an entity or a lease of 35 or more years, including options.  Also, a lease for any term of or an exclusive right to use property owned by a government entity creates a possessory interest which interest is subject to property taxes.

Generally, a "change of ownership" occurs with a transfer of a controlling interest in an entity (e.g., more than a 50 percent interest) to one person or entity resulting in a change in control of the entity.  However, there are some transfers in title that will not involve any tax consequences, such as original co-owners transferring title from one form to an entity in the same proportion or certain trusts (although subsequent transactions may trigger a "change of ownership" even if no owner obtains more than 50 percent of the ownership interests, such as when the original co-owners cumulatively over time transfer more than 50 percent ownership interest in the new entity), or transfers between affiliates.

While there is no need for property owners to know all of the various rules and exceptions relating to a "change in ownership," it is important to know enough in order to be alert for situations that may give rise to this occurrence.  Savvy property owners will involve their attorneys early, because careful planning in the structuring of transactions can void triggering events that will result in a reassessment.

Additionally, remember that the time for filing an Appeal triggered by a "change of ownership" is very brief, as discussed previously.  So, if you receive a notice and have any doubt as to whether a "change of ownership" in fact occurred, consult an attorney to file your Appeal properly filled out and quickly to preserve your rights.  (An Appeal can always be dismissed at a later date, but the consequences of a missed filing usually cannot be reversed.)

Avoid Or Minimize Documentary Transfer Taxes

Generally, when a transfer of real property occurs, such as with a change of ownership or change in title, a county and sometimes a city documentary transfer tax is assessed based on the property's value.  Several counties have either enacted legislation (San Francisco) or take the position that a change in ownership of an entity triggers transfer taxes.  These transfer taxes have increased substantially (e.g., San Francisco in recent years).  However, there is a broad range of interpretation among the various cities and counties in California.

One exception is that a mere change in the form of ownership from or to an entity is excluded from county and local transfer taxes as long as the change in form is proportional to the initial investment.  There are also several court decisions and many exceptions to the rules that may apply to situations that would otherwise appear to warrant a transfer tax.  A City's transfer taxes (e.g., Oakland) can often be greater than the county tax, depend on the local jurisdiction's ordinances and interpretations.

In the event that you question the appropriateness of a transfer tax payment, there typically is a one-year statute of limitations to file for a refund.  Once again, you should carefully plan to avoid or minimize the applicability of these taxes before you effect the transfer.

Additional Money Saving Tips

A very important method of saving your tax dollars is by avoiding penalties.  This requires that you either familiarize yourself with all applicable rules or have competent counsel to assist you in ensuring that all appropriate documentation is filed on time.

There are many rules that fall outside the purview of routine, day-to-day concerns, which may escape your attention.  For example, a change of ownership statement must be filed with the State Board of Equalization within 90 days of any transaction involving the acquisition of real estate in California, when it is acquired indirectly through acquisition of control of a legal entity.  A penalty of 10% of the tax applies for the failure to file timely.  The filing of the preliminary change of ownership statement will also start the running of the four-year statute of limitations on supplemental assessments.  A Form 571L Business Property Statement must be timely filed by the last Friday in May by anyone doing business in California when their business personal property, such as office furniture, equipment and art objects, exceeds the sum of $100,000.  Also, watch for duplicate assessments, where the tenant is being assessed separately on its tenant improvements and the lessor's property value is being determined by the income method assuming that the property is fully improved.

If you are involved in any renovation projects, you should know that there are certain types of improvement costs that can be excluded from your additional assessment.  These exclusions include costs incurred for seismic or earthquake retrofitting, fire suppression or improvements in accessibility pursuant to the Americans with Disabilities Act (ADA).  However, you must act quickly in applying for these exclusions as soon as they are identified, usually at the beginning of the project.  If you have not filed within 30 days of project completion, you lose the opportunity to save these taxes.

Additionally, if you are involved in new construction, be sure to segregate costs that do not add value to the project, such as demolition, excessive ground preparation and change orders.  Also be sure that your tenants are aware of these provisions and avoid any duplication in reporting the same costs.  New construction will increase the property's assessed value.

There are also some situations that can be negotiated on your behalf for payment of your tax bill, such as an escape assessment, allowing for payment over five annual installments without accruing interest.  There are other situations that allow for a cancellation of penalties, interest and/or redemption fees on delinquent taxes.  Competent legal counsel can assist you in determining when these situations apply.

In summary, commercial and residential real estate property owners should not be afraid to challenge the property values that an Assessor assigns to the property.  With attention to detail and careful planning, real estate taxpayers can significantly reduce their annual property tax obligation.

Copyright © 2015 Coblentz Patch Duffy & Bass LLP, All Rights Reserved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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