Six Actions for California Property Tax Relief
Invoke is putting a focused effort on informing and guiding our clients on how to best pursue property tax relief in light of the immediate and future negative impacts on property value caused by COVID-19. In California specifically, there are a number of approaches available to help ease the property tax burden many owners of commercial real estate and business personal property are faced with.
- Calamity Claims – Due to COVID-19, the Governor of California declared a state of emergency on March 15, 2020 and ordered the closure of non-essential businesses to help stem the spread of the virus. It is the opinion and position of Invoke that businesses and their real estate closed by Governors’ orders qualify for temporary property tax assessment relief as described in California Revenue & Code Chapter 2.5 Disaster Relief [170.a.1].
- Prop 13 Appeals (Base Year) – In California there are two events that trigger the County Assessor by law to reassess fee simple interest of tangible real estate as of the event date. First, when new construction occurs, it is re-assessed at current market value as of the date of completion. This establishes a new base year value for the property’s newly constructed improvements only. Second, whenever there is a change in ownership or control of real estate, the real estate reassessment of the sale becomes the base year assessment and will be the basis of property taxes for as long as it is owned, plus a maximum 2% inflation factor. For investors of certain property types, the key word is tangible since some property sales, such as with hotels, involve a significant amount of intangible assets that are exempt from reassessment according to California law. It is crucial that an investor seek professional assistance from a firm that can readily identify and quantify the intangible portion of value.
- Prop 8 Appeals (Decline in Value) – Whenever the current assessed value exceeds the current fair cash value for a property in California, a Prop 8 appeal is warranted and highly recommended. The process is similar to a Prop 13 appeal, but any reduction is temporary until the real estate market recovers and the base year is re-established, plus the interim maximum 2% inflation factor. The option of a Prop 8 appeal should compel every real estate owner to be realistic and review the assessment and valuation of their real estate annually.
- Cost Segregation – A Cost Segregation Analysis can help identify several avenues for potential missed property tax savings. First and foremost, proper classification of construction and FF&E makes sure that some items are not reported as personal property, such as light fixtures which are part of the real estate, but for income tax purposes are classified as short-term assets. Additionally, this analysis provides an accurate basis and classification of the most advantageous position for personal property tax reporting purposes on 571-L returns going forward. Finally, it accurately establishes total costs which is crucial towards the Prop 13 base year assessment that eliminates intangible assets.
- Business Personal Property – Due to COVID-19 disturbances, taxpayers may be entitled to business personal property tax relief. There are several methodologies that can be utilized to ensure your tax basis is fair despite any operational limitations (i.e. temporary closures, adaption to government mandates, lack of demand). It is important to note that tax jurisdictions may issue business personal property assessments as if fully operational during 2020. Even if preemptive relief is provided, it may not be adequate for a specific industry’s situation. Almost every business has seen some form of “external obsolescence” – external disruptors which are beyond the control of the taxpayer. There are many avenues available in regards to protesting assessments including formal valuation appeals, calamity appeals, proactive business personal property renditions, and audit defense.
- Direct Assessments – Direct Assessment charges appear on the secured property tax bill and are not based on valuation (non-ad valorem special assessments). A property analysis will determine whether direct assessment charges are appropriate and in accordance with California state law. Refunds and credits can be secured in the year and for prior years, as statutes permit.
Invoke Tax Partners delivers property tax solutions to owners of commercial real estate and business personal property in California and across the nation. With more than 200 years of combined property tax experience, our California Tax Team is committed to tried-and-true methodologies and equipped with modern technology. We strive to create a meaningful partnership to invoke impactful tax savings your firm deserves.