As a real estate business, you know the importance of controlling your expenses to maximize profitability. One major expense that can significantly impact your bottom line is property taxes as research shows that approximately 60% of properties in the United States are over-assessed.. through a property tax appeal, you can potentially lower your property tax bill to increase in saving and reduce your tax bill.
Benefits of Property Tax Appeals for Commercial Properties
Property owners have the legal right to contest their property's assessment to get their property tax assessment reduced. Commercial property owners, who often pay higher property taxes than residential property owners, can benefit especially from this method.
When successfully appealing the value of your property, you can lower your tax bill and free up cash flow to reinvest in your business. A decreased property tax bill will make your property more attractive to buyers if you plan on selling your property. To gain a deeper understanding of the benefits of tax appeals please refer to our blog “Importance of Property Tax Appeal for Residential Properties”.
Types of Property tax assessments
Before we begin the property tax appeal process, it's critical to understand the different types of property tax assessments. There are two primary types of assessments: market value assessments and income assessments.
Market Value Assessments
Market value assessments evaluate the market value of your properties, the market value is determined by assessing the value of similar properties in the area and taking into consideration any improvements or unique features that your property includes.
The process begins with a property appraisal, which is an estimate of the property's value based on its condition, location, and other factors. The appraiser will then compare the property to other similar properties in the area that have recently sold to determine a market value.
Once the market value has been determined, the assessed value is calculated by applying the local tax rate to the market value. The assessed value is the value used to determine the property owner's tax bill.
Income Assessments
Income assessments evaluate the income that is being generated from this property, it takes into account the rental income being generated from the property, the property’s operating expenses, rental rates, vacancy rates and other factors that affect the property’s income.
Once the assessor has gathered all of this information, they will use it to calculate the property’s net operating income, which is the revenue that the property produces after deducting all expenses.
The assessor will then apply a capitalization rate to the NOI. This rate reflects the expected return on investment for the property and takes into account factors such as the risk associated with the investment, interest rates, and the overall health of the real estate market then multiply the rate by the NOI to retrieve the estimated property’s value.
Factors to Consider
When appealing your property tax assessment, there are several factors to consider that can impact the success of your appeal. These factors include the following:
Provide evidence of properties near yours that are similar to yours that have sold for a lower price to be used as a powerful argument when assessing your property tax appeal.
The property’s condition plays a case in deciding its value, if your property is in poor condition, it may be assessed at a lower value. However, if you’ve recently made improvements to the property, you may be able to successfully argue for a lower assessment.
The local real estate market that your property resides in affects the property’s price, if property values in your area have recently declined, you may be able to successfully argue for a lower assessment.