News & Articles

Are You Overpaying Your Taxes? How To Tell And What To Do

Posted on Mon, Nov 04, 2013

describe the imageWe've all heard the quote: "In this world, nothing is certain except death and taxes." Paying taxes is a necessary evil, made worse if you are paying too much. Experience indicates about half of all businesses overpay their real estate taxes.  But how do you know if you're one of those? And if you are, what recourse do you have? The situation is not as bleak as it may initially appear. 

What Determines Your Tax?

For most businesses, real estate taxes are assessed based on a property's value, which is often created through 'mass appraisal' methods. This means that your property is not individually assessed, but rather is lumped in with similar properties in the area. Now, this is fine for some businesses, but for most, the mass appraisal method is more likely to end up assessing you at the wrong value. A number of factors make up your property’s assessment. For example, what is the size of the property in question? How old is the facility? Where is it located? These are just some of the questions that will need to be taken into consideration.

How is Real Estate Valued?

There are three common methods for valuing any type of property. Each of the three methods can result in significantly different values. Understanding the differences can help you focus on the one or two that are the most relevant for your property type.

The Cost-less-Depreciation Method: Many assessors rely on this approach because it allows them to quickly calculate the value for a lot of properties (Mass Appraisal). Software programs have been developed which allow the assessor to input the physical characteristics of a building once, and the program calculates the value of the property each year thereafter. The software calculates the cost to construct the property (using the physical characteristics) and applies a physical depreciation factor to arrive at the value of the property. This method often produces inaccurate assessments, especially on buildings more than a couple years old, since factors like economic and functional obsolescence are often not considered. This method generally yields the highest value of the three valuation methods. Given that this is the method most often used by assessors, there is a good chance that your property is overvalued if this method was used.

The Market/Sales Method: This method uses the sale of similar properties to determine value. For the majority of manufacturing properties, this method will yield the best estimate for the market value of the property. The challenge with this approach is identifying truly comparable properties, and then determining how to handle any differences between your property and the comparable property. No two properties are identical, and interpreting how the differences affect the value of the property is as much art as science. Factors such as building location, size and age create difficulties in estimating your property's market value.

The Income Method: This method values a property based on the building’s ability to produce an income stream. This method is most frequently used to value hotels, multi-tenant office buildings, golf courses, and any other property for which the buyer is essentially purchasing the income generated by the property. Of the three methods, this may be considered the most complex since its proper use requires an understanding of the net income that the property actually produces, as well as what it would produce long-term.

Understanding the correct valuation method for your property-type is imperative to arriving at the best estimate of market value.

Should You File an Assessment Appeal?

Obtaining an accurate property assessment is the key first step to ensuring that you’re not overpaying your property taxes. For that reason, businesses that want to know if they’re paying too much should first determine the accuracy of their assessments. If a review uncovers discrepancies in the valuation of a property, then it’s time to appeal that valuation.

Data and Valuation Review

The first step in any appeal is to review the assessment of your property and ensure its accuracy. The review includes verification of Assessor’s data such as age, size, construction type and building location.

Once the property data has been verified, other factors regarding the property’s valuation should be given scrutiny. A valuation analysis should be conducted to ensure that current market activity was taken into account when determining the assessment. Since the assessment is primarily based on the cost approach, a valuation analysis using the sales and income approaches to value should be completed. If the analysis results in a value lower than your current assessment, an appeal should be considered.

Informal Discussions with Assessor and Board of Review Appeals

The results of the data review and valuation analysis should be presented to the assessor during informal discussions to determine if the inaccuracies were the result of a simple oversight. This also gives property owners the opportunity to request that the assessor provide any other information to support the initial assessment. Often, assessment inaccuracies can be addressed at this stage, eliminating the need for formal appeals and hearings.

In Michigan, these discussions should take place in February and early March. The Assessor has the ability to revise the property assessment anytime prior to the close of the local Board of Review, which generally occurs in the first three weeks of March. The assessment notice you receive in February will outline the exact timing for your local community.

Formal Appeals and Hearings

Barring an assessment reduction during informal discussions, the process moves to appeals at the Michigan Tax Tribunal. Appeals must be filed by May 31. Even if you have not engaged the Assessor in informal discussions, commercial and industrial taxpayers have the right to file an appeal with the Tax Tribunal. The length of time it can take to appeal a property tax assessment can vary widely – from several months to several years. Most appeals do not result in a trial, but are settled through negotiations with the local community.

While the property is under appeal, you will continue to pay taxes based on the Assessor’s value. Once a settlement is reached, you will be refunded for overpaid taxes with interest. Further, because of Proposal A, the value on which your tax is based cannot increase more than CPI or 5% in any year. An appeal essentially “locks in” savings for years to come.

Examples of Tax Assessment Appeal Successes

Clients of our partner firm have saved significant amounts of money on their tax liabilities through the appeals process. For example, a manufacturing facility saved an amazing 57% on their $474,000 tax liability – a $250,000 annual reduction. A golf course with an annual tax liability of $280,000 realized $112,000 in savings – a 40% reduction.

Seek Expert Advice

If you’re not sure whether you’re paying the right amount of tax on your property, contact Kristen Cichon and he can guide you to professionals in this area who can quickly evaluate your situation at no cost.

Tags: Real Estate Taxes, Overpaying on Taxes, business consulting, CPA Firm, Articles, Echelbarger, EHTC