Avoid overpaying nursing home property taxes: a primer on the pitfalls leading to unnecessary overhead.

Annual property taxes for nursing homes can represent a significant overhead expense. Many nursing home administrators, operators, and owners are unaware that property taxes are an annual operating cost that can be reduced.

Assessment Authorities

There are 51 different sets of property tax assessment laws in the United States--one for each state and the District of Columbia. Within individual states are regional assessors, county, district, city, village, town, and other local municipalities. Because of the numerous property tax assessment authorities, and their interpretations of the state property tax assessment statutory laws, it is important to know as much as possible about the assessment jurisdiction where your company pays annual property taxes.

Personal Property Assessments

The majority of states that assess personal property require annual personal property return forms to be completed and filed on a timely basis. Each state has a statute, or statutes, that define "taxable personal property." Also, in addition to court decisions, many jurisdictions publish guidelines that interpret "personal" versus "real" property. Whether personal property return forms are prepared by an outside accountant or service bureau, steps can be taken to reduce annual personal property tax assessments.

Most companies "roll over" their personal property self-reporting form schedules every year by relying on the previous year's self-reporting form and updating it with asset disposals and current-year asset additions. Overassessments can easily be submerged on the self-reporting form schedules, unless an itemized review of personal property is completed. The benefit of an itemized review includes verifying that the asset is still on the premises and in use. Make sure taxes are not being paid on items that are no longer on-site.

Many companies are not aware of the full scope of certain statutory personal property assessment exemptions. Personal property overassessments can occur because statutory exemptions are not being maximized. Make sure your facility is maximizing the use of all available personal property assessment exemptions.

Another way personal property tax overhead can be reduced is to eliminate any overassessments that exist because of double assessments. Certain real estate improvements can also be assessed as personal property. Make sure that no double assessments exist between the personal property and real estate tax assessments.

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Some taxing authorities establish annual personal property assessments with their own estimates if no personal property return form is filed with them. These are sometimes identified as "doomage assessments," and they can increase over time. If a doomage assessment exists for your organization's personal property, prepare a proper personal property return form and file it on a timely basis with the assessor. It may be possible to reduce the current year's personal property assessment with the filing and, if not, positive results can occur for the next assessment year.

Real Estate Assessments

It is extremely difficult to analyze and evaluate real estate assessments unless you know both the factual basis and valuation methodology being employed to establish the annual assessed valuations. Assuming some type of record exists within the assessor's office, personal contact should be made or a local tax specialist should be retained for assistance in obtaining written copies of all documentation contained in the assessment authorities' records concerning your real estate. Personal contact provides the opportunity to introduce your company to the local assessor and establish favorable communications. Retaining a local property tax specialist offers the advantage of using a local firm or individuals familiar with the assessment authorities' records, and helps ensure that all records are provided in a timely manner. This also serves as a convenient resource for completing a preliminary review of the records.

Correcting factual errors in the assessment records that have resulted in an over-assessment can be one method of reducing a real estate assessment. Facilities should cross-check all factual data contained in the assessment records and provide the assessor with correct information immediately if errors are identified. A local property tax specialist can complete this task with the assistance of corporate personnel.

If the assessment authority does not have a current diagram, drawing, or sketch of the building or site layout, provide one. Personnel within local assessors' offices appreciate taxpayers that maintain good communications with their offices and provide them with information that can help them do their jobs more effectively and efficiently.

Valuation

Each state has adopted its own statutory definition of "value" for purposes of estimating annual real estate tax assessments. It is vital to determine the specific value standard for each jurisdiction where your corporation owns or leases real estate. In addition to knowing the applicable definition of value, it can be useful to be aware of key administrative and judicial interpretations of the standard.

The majority of states employ a market value standard for purposes of establishing annual real estate tax assessments. Many states apply equalization rates to the assessors' estimates of market value to derive the assessed valuations. As a result, some companies receiving assessment notices and tax bills are not aware that the values stated are at a reduced percentage of market value. The assessed value must be equalized to 100% to determine the estimated market value placed on the real estate by the assessor. Learn about the equalization procedure and how it affects the real estate your company pays property taxes on.

The three traditional approaches to estimating the market value of real estate can be applied to your corporation's real estate to evaluate whether an overassessment exists. Unfortunately, certain assessment authorities do not use, or consider applicable, all three appraisal approaches. Each state has adopted some form of guidelines, standards, rules, policies, and statutory laws that govern how real estate assessments are to be established. The latitude each assessment authority has in selecting the specific valuation methodology to be applied to different types of real estate varies from state to state and even between local assessment authorities. Some states have very specific laws that require only a certain valuation methodology to be applied by the assessor for particular types of real estate, while others give local assessors extreme discretion not only in the method applied, but also in how the final assessed value is determined.

It is important to determine both the required and the optional valuation methodologies the assessment authorities can apply. A local tax specialist can provide you with insight concerning the valuation methods that are required, those that are optional, and what a particular local assessor favors. Surprisingly, the methodology that is used by an assessment authority can change from year to year, depending on personnel changes in assessors' offices, law changes, and administrative practices.

Finally, relevant local real estate market sales and lists of competing properties for sale or lease provide useful data to evaluate whether a particular assessment is low, high, or fair. Without insight into current real estate market conditions, your properties may be overassessed, and you may be paying more real estate taxes than are appropriate.

Property Changes

Many assessment jurisdictions use the same assessed valuations they place on real estate year after year without revising them. Owners, operators, and administrators should document property changes to justify reductions to real estate assessments. Changes in building condition, rates, occupancy, use, economic conditions, governmental regulations, local market conditions, functional deficiencies, and many other factors can be significant. Assessed valuations of real estate are based on key facts and assumptions, and significant changes can and do dramatically affect the market value of real estate. It should also be noted that, in some circumstances, a property could be under-assessed. An increase in the assessment should not be triggered by a mere review of the basis and methodology of the most recent assessment.

Economic conditions in the area, or within the industry, can cause economic or external obsolescence to the real estate your company owns or leases. Assessment authorities do not necessarily automatically reduce real estate assessments because of the loss in value caused by factors outside the property. External obsolescence can be temporary or permanent, and can adversely affect both land and building components of a property's market value.

Critical Dates and Deadlines

A systematic approach should be established within your corporation to be aware of critical dates and filing deadlines for each property you have in each local jurisdiction. Each state has its own assessment or valuation date that is a statutory and critical date. The assessed market value is affected by progress of new construction, date of occupancy, remodeling under way, vacant space, physical condition of the building, and utilization of the building. The market value of a building only partially constructed as of the assessment date can be dramatically different from a fully finished operational building later in the year. Be conscious of the assessment date and use it in your favor to control, and possibly reduce, your real estate assessments.

It is important to be aware of the timeline local assessors work on in establishing the assessed valuation of your real estate. If an assessor must have a value set by May 15, and you provide him or her with critical data on May 14, rather than in January when it was requested, your ability to informally influence how the assessed valuation will be established will be lost.

Be sensitive to the local assessor's situation. Most assessment authorities must operate within time constraints to complete their estimates of value, and often face staffing limitations and inadequate resource materials. Moreover, those charged with the administration of the property tax are not necessarily provided with the necessary tools and resources to complete the task.

Although the goal is to develop an amicable working relationship with local assessment officials, situations can arise that might compel you to consider filing a formal objection to a specific real estate assessment and pursuing an appeal. For states and local jurisdictions where a formal assessment appeal may be necessary, determine the deadline date for filing the formal objection or appeal documentation. Besides other advantages already mentioned, a local property tax specialist not only will be expert on upcoming appeal deadlines, but also can assist in the timely and proper filing of the documentation necessary to make a valid appeal. It may appear simplistic to know appeal deadline dates, but there are numerous objections and appeals throughout the United States that are summarily denied or rejected because deadlines are missed. By staying ahead of the critical dates and deadlines, your company can avoid losing an opportunity to reduce a real estate tax assessment.

Property Classification and Exemptions

Numerous other aspects of property tax assessment merit your consideration. For example, many jurisdictions have different categories of property for purposes of property tax assessment. Classifications are often dependent on the land use, and some property classes qualify for preferential treatment. Consider becoming aware of the prerequisites, as well as the limitations and benefits, of property classifications where you have real estate. Some assessment jurisdictions have property tax exemptions for certain users and types of property. You should explore what exemptions exist where you own or lease property, and determine whether an exemption may be applicable or available for your property.

Appeals

Real estate is usually assessed based on an estimated market value. Overassessments can be identified and reduced by proving to the assessment authority that the nursing home's real estate is being overvalued for purposes of real estate tax assessment. A formal, written real estate appraisal report that was done within three or four years of the official assessment date, and that proves the assessed valuation is excessive, should be submitted to the assessor for consideration in revising the current year's assessed value or the next assessment year's value.

If the nursing home is for sale, and the assessed value is higher than its listing price, submit a copy of the listing contract to the assessor and request that the current year's assessment be reduced to the listing price or less. If formal, written offers have been received that were too low, or some of the contingencies prevented the sale from closing, consider submitting photocopies of the offers to the assessor to request further reduction of the assessment.

Assessment jurisdictions that apply an income approach to establish the annual real estate assessment often have to rely on revenue and expense estimates rather than actual income and expense data. Analyze the income approach being applied, and provide the assessment authority with actual historical financial data to prove the assessed valuation is excessive and should be reduced. It is advisable to check with the local assessor that if financial data are submitted to his office with the express request that it be maintained as confidential, the request will be honored. Most assessment authorities will keep this financial data segregated from public records.

Conclusion

Reviewing and reducing annual property tax overhead should be an ongoing process and not a onetime project. Each assessment jurisdiction has its own nuances in assessment practices, procedures, and systems of formal appeal. Local real estate market knowledge is very important in effectively evaluating a real estate assessment. Retaining local expertise in the market where a property is located can have a dramatic impact, not only on whether an assessed valuation is considered excessive, but also on the results that can be achieved in reducing it. The proactive approach of annually reviewing personal property and real estate tax assessments can result in the reduction of a major operating expense and enhance the market value of the real estate.

William B. Ardern II is an attorney and property tax consultant. He is a Principal of Wisconsin Property Tax Consultants, Inc., a Mequon, Wisconsin, firm that specializes in real estate and personal property tax assessments in Wisconsin. He can be reached at [phone]. To send your comments to the author and editors, e-mail [e-mail]. To order reprints in quantities of 100 or more, call [phone].