We asked Mark to provide some tips to our readers on how they might save or reduce their property taxes. In 2004, Mark established Independent Tax Representatives (ITR), a prominent, boutique property and transfer tax consulting firm in San Francisco. Prior to founding ITR, Mark led the property tax groups at two national accounting firms.
What is new in property taxation?
Although the law has been in existence for many years, it is only recently that we’ve seen major developments in the area of intangible properties. Two recent cases, SHC Half Moon Bay and Elk Hill Powers provided us with much needed clarification and guidance in this area.
Intangible property is not assessable for property tax purposes and is not taxable for transfer tax purposes in California. A seller of a $100 million franchised hotel can “carve out” as much as 25% of the sales price to be excluded from transfer tax basis for the seller and be excluded from property tax basis for the buyer. Both the buyer and seller can save hundreds of thousands of dollars of transfer and property taxes. Preferably, the intangible value study is done before the sale.
Can property tax laws and rules be misinterpreted?
It happens more than one might think. Property tax laws, perhaps more than other type of tax laws, are subject to interpretation. Two readers reading the same passage may reach different conclusions. Even established laws like Prop 13 may be forgotten if a property tax appraiser is not careful. He may attribute value increase to a portion of the property, such as land, that is not subject to re-appraisal. Property owners should engage experienced consultants to carefully go through assessment records to look for errors, omissions or misinterpretations of the law that may cause over or even double assessments.
Many of our clients constructed or renovated properties in the last few years. Are there any opportunities?
Yes. The first thing to remember is cost does not always equal value and value is the basis of assessment. There are at least two concepts here. First, cost is the sum of an owner’s expenditures, a consumption concept. But value is what a buyer is willing to pay, an exchange concept. Second, certain code compliant related costs are not assessable by law. It is critical to keep detailed construction or renovation cost records, so a segregation analysis for assessment purposes can be done later. It is equally critical to ask: can the assessment be lower than the cost?
To exclude certain construction costs, an owner has to timely file claims for exclusion from new construction.
How can our clients realize maximum sales proceeds by minimizing the buyer’s property taxes?
Typically when property sells, a buyer pays higher property taxes than the seller. However, the buyer’s taxes can be kept at the seller’s level if the circumstances are right.
An asset owned by an institutional client will typically hold the title in a legal entity. If the ownership of that entity can be sold to multiple parties that do not have the same composition of owners so no party gets more than a controlling interest (>50%), then there is no change in ownership due to the sale.
In our current peak economic conditions, is there any opportunity to get an assessment reduction?
It depends on asset type. Industry disrupters like Uber and Amazon have fundamentally changed commercial real estate. Uber makes owners take out garage spaces and add more dwelling units; Amazon and eCommerce effectively reduced the demand side of the equation of retail properties.
Since 2017, no less than 6,000 retail stores have closed nationwide annually. Even high-end shopping areas, like Union Square in San Francisco, are not immune to the “Amazon Effect.” The result is a drastic decline in the number of new leases signed, and an equally drastic increase in vacancy rates. Rental rates also declined by as much as 50% from 2014-15, the peak year for high-end retail in San Francisco. With the drop in rents and increase in vacancies, values have decreased and opened the door to reductions in the assessed values.
Property and transfer taxes are significant, yet manageable, expenses of real estate ownership. Any ownership change, redemption or capital call may have property tax consequences. The best time to consult your property tax advisor is in the planning stage of your pending business transaction. Property owners should take a proactive approach rather than a corrective one, as the latter can be far more costly and time-consuming.
Mark Ong is the Founder and Managing Director of Independent Tax Representatives, LLC. Contact Mark at [email protected] or call 415-495-3333.