Checking the Tax Man

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As a stable owner or operator, you might be paying too much in property or real estate taxes. It’s the one aspect of your business that is most often ignored and yet it is also one of the likeliest to be chock-full of errors. Even tenants, especially those whose rents increase as property taxes escalate, can profit from a review of the property tax assessment.

According to a recent Coopers &?Lybrand survey, a whopping 75 percent of 375 senior financial executives in large firms challenged the property tax assessments on their employer’s property. What’s even more surprising is that nine out of ten of them felt that they were successful in reducing their company’s tax bills. When asked which tax had increased the most during the past few years, those surveyed were as likely to mention property taxes as they were to single out the far more visible income tax.

An Ignored Tax

If property owners pay almost $10 billion in real estate taxes each year and yet those taxes are so successfully challenged, why aren’t more stable operators doing something about reducing their own property tax? Or, more to the point, why are assessments so inaccurate?

In many cases, property values are arrived at by understaffed, inexperienced workers in the tax assessor’s office. Incredibly, the tax assessor himself is usually either an elected or appointed official often with little formal training, no professional qualifications and little experience in this area of taxation.

Another reason for the inaccuracies is revealed by a quick look at the many property tax systems (every state is divided into local property tax jurisdictions, totaling well over 14,000 separate taxing authorities) in the United States. Once upon a time, all residential and commercial properties were valued and taxes were assessed. As individual properties changed hands or improvements were made, the basic assessed value increased—theoretically. Rarely did anyone ever check to see whether that original assessment was correct.

The operator who has built a new stable is usually assessed at a value that is supposedly in line with the value placed on similar, neighboring properties. But, is that stable properly categorized?

The state laws that give local property or real estate taxing jurisdictions their power and guidelines usually break all property down into categories. In Alabama, for instance, all agricultural, forest, residential property and historical buildings and sites are “Class III” properties and are taxed at 10 percent of market value. By contrast, in Tennessee, farm-related property is “Class IV” property and valued at only 25 percent of market value. Thanks to the many different definitions used across the country, it’ll take some digging to determine whether a stable or horse barn is considered farm property.

In jurisdictions where there is no substantial reduction for farm property, a conservation easement might help reduce value. A conservation easement is a stipulation placed on a piece of property that means it can’t be developed and is usually preserved as open space for a period of time. Ownership remains with the landowner, but stewardship of the land is usually placed with a non-profit group (the town, state parks department or a regional Land Trust) and the easement remains no matter how many times the property is bought and sold. (In cases where the easement lasts forever, there might be a valid federal income tax deduction allowed.)

In many states, conservation easements are recognized by local property tax jurisdictions, but they differ in how they are taxed. In Connecticut, for example, some towns will exempt a piece of property from being subject to property taxes depending on the details of the easement. In other towns, where a landowner wants to place an easement on a section of his land, the land might be eligible for an “open space” assessment. That would reduce the land’s value and reduce its property tax bill. Aside from the obvious tax benefits, land under conservation easements can usually still be used for trail riding as long as no fences are built on it. It is worth a call to the local assessor’s office to find out how the municipality handles conservation easements if you have a piece of land you don’t plan to build on or use as pasture.

Check the Assessor’s Math

Armed with a few facts about the stable-related property, it is relatively easy for anyone to review their property’s record in the tax assessor’s office. Such records are public records and, as such, are available to anyone. Most tax assessors, in fact—elected or not—are eager to cooperate and are usually willing to correct any errors that are detected and brought to their attention. And, boy, do those errors exist.

Two-story buildings where only a one-story building stands, a 200-foot deep building on a lot only 75 feet deep, parking lots that are really on a neighboring property. The list of errors is virtually endless. But you’ll never know whether errors do exist unless you check.

Property Valuing Methods

There are three methods generally used by assessors to determine the value of a given property: the market value approach, the cost approach and the income approach. The market value approach determines a price—based on the fair market value of neighboring properties—that the property would bring if there were a willing buyer and a willing seller. The cost approach uses the dollar amount spent on improvements or estimates the cost for replacing a building on the same property. The income approach estimates an amount the property could produce in a year’s time if it were rented or leased.

Most local assessor offices follow state guidelines when appraising properties, using the different methods either independently or in combination with one another depending on the type of property being assessed. Normally, once your property’s appraisal is complete using each of these approaches, a correlation is drawn to determine the final assessed value. That is not to say that the three methods are averaged together; rather, they are all considered, with the most weight given to the one that is most appropriate for that property. Obviously, a lot depends on the view or judgment of the one valuing or challenging the assessment of a property.

As Fair As You Can Make It

Because all property taxes are considered “Ad Valorem” taxes—that is, taxes that are based on the value of the property—so many variables enter into the equation that it is rare that the assessor and the property’s owner will agree on a value.

However, should the assessor refuse to correct any errors found on the assessment record for your stable operation’s property or should you want to challenge an assessment on the grounds that it is not comparable to other, similar properties, the matter can be taken before a local appeal review board. In some jurisdictions, it may be necessary to complete and submit a formal complaint in order to go before that review board.

In most cases, the appeal review board is an informal meeting between the property’s owner (or his or her representative) and a small group of citizens appointed or elected to the job. Rarely are these hearings formal.

However, as when attempting to sway the local assessor, a smart stable owner or operator will amass as much documentation as possible to support a claim for a reduced valuation. Clearly, the first step to take before the review board is to show that the current value of the property and its computations are wrong.

In the event that the assessor turns a deaf ear to a request to correct errors and if the local property tax review board denies a request for a lower valuation, the next step is to present the case to the state Board of Appeals. And, finally, in those rare instances where these steps have failed, the entire matter can be taken to court.

Horror stories abound about the errors in property tax assessments. The fact that so many of the few property owners who bother to check their assessments substantially lower their property taxes should provide all of the incentive needed by any stable owner or operator. And the time to review those assessments is now, not when the local assessor reassesses all of the properties within his or her jurisdiction and certainly not when that new addition is completed.

Mark E. Battersby is a freelance writer, lecturer and advisor specializing in taxes and business finance.