This line of thinking is particularly common in states that use market value as the standard and where the purchase price was based on an appraisal. While this may be reasonable for budgeting worst-case tax accruals, such thinking could result in missed opportunities to reduce the actual property tax burden on the property.
Permissible Approaches to Valuation Vary
There are several reasons a property’s investment value, or even its market value, might differ from its value for tax purposes. Such considerations include whether the acquisition or investment value includes non–real estate items such as personal property, or intangibles such as long-term leases or business value. Taxpayers should closely examine all of those issues to ensure that only taxable property is being assessed (and then, at the correct value).
There is another, often-overlooked dimension of savings available to many taxpayers, in the form of seemingly hidden tax benefits conferred by statute.
Indiana, for example, has a number of assessment statutes that dictate specific approaches to determining taxable value, depending on the type of property at issue. For instance, there are different and property-specific assessment statutes for oil and gas interests, agricultural properties, low-income rental housing, golf courses, and casino riverboats. One property type receiving this unusual valuation treatment is apartment or multifamily rental properties.
As a class, multifamily rental property in many areas has experienced quite a run in renter and investor demand since the Great Recession. In several jurisdictions, the bursting housing bubble drove former homeowners into rental housing in droves, boosting occupancy rates and investor demand along with it.
But even as investors continue to bid up asking prices in the marketplace, Indiana law requires apartments to be assessed at the lowest valuation determined by applying the three standard approaches to valuation, which are the cost, sales comparison, and income approaches. This means owners and appraisers would miss the mark in estimating the taxable value of apartments or multifamily rental properties if they applied only the typical approaches used to evaluate a property’s investment value or market value.
The Indiana Board of Tax Review, the state agency that reviews property tax assessment appeals, has issued several decisions confirming this mandate. One such case, Merrillville Lakes DE LLC v. Lake County Assessor, involved a taxpayer challenging its 2010–2014 assessments for an apartment complex in Merrillville, Ind. Both the assessor and the taxpayer presented appraisals at the administrative hearing, but only the taxpayer’s appraiser relied on the specific apartment-valuation statute to develop his opinion of taxable value.
In rejecting the assessor’s appraisal, the board explained that Indiana Code 6-1.1-4-39(a) specifically applies to the valuation of rental properties such as the one at issue. The board stated that the statute “provides, in part, that the true tax value of real property regularly used to rent or otherwise furnish residential accommodations for periods of 30 days or more and that has more than four rental units is the lowest valuation as determined under the cost approach, the sales comparison approach, and the income valuation approach. [The taxpayer] emphasized the importance of this statute, while [the assessor] simply ignored it altogether.”
In this case, the values developed by the taxpayer’s appraiser under the cost approach yielded the lowest indication of value, and the assessor did nothing to show that those values were inaccurate. The board concluded that the assessor’s omission of a cost approach analysis was a significant flaw in the case, though in a number of prior cases involving the same statute the board had determined the assessed value of an apartment property at the lowest valuation approach even when fewer than all three approaches had been used.
Based on the statutory code and the appraisal in the Merrillville Lakes case, the Indiana Board of Tax Review ultimately lowered the assessed value of the apartment complex for each contested year based on the taxpayer’s cost analyses. Because the statute dictates that the lowest of three approaches determines the tax value, even if the owner had purchased the property for far more than the cost approach indication of value, the board couldn’t have increased the value to the higher sales price.
Due Diligence Can Yield Savings
Rulings like Merrillville Lakes serve as a useful reminder, not just for apartment owners but for any commercial property owners, to always survey local laws and make sure the property in question isn’t overassessed and, thus, overtaxed.
While it may seem like common sense to assume that a property’s purchase price is a valid proxy for its taxable value, as the Indiana ruling shows, that’s not always the case. Like Indiana, many jurisdictions have specific assessment statutes that result in taxable values well below the property’s purchase price or the value indicated under the income approach.
A little due diligence could result in a lower valuation and, with that, significant savings.