In real estate transactions, give taxes their due.

Property taxes are a significant expense for real estate owners. They can also fluctuate dramatically as property values are reassessed. It's critical, therefore--whether you're acquiring real estate in a stand-alone transaction or in connection with a corporate merger or acquisition--to analyze the potential impact of these taxes as part of your due diligence.

Careful consideration of property taxes prior to an acquisition serves several important purposes. It helps you determine an appropriate purchase price and accurately budget for your operating expenses. A thorough analysis may also reveal opportunities to reduce your taxes on assets that are misclassified, overvalued, or double-counted.

Assessing the Situation

To get a handle on a transaction's property tax implications, be sure to have a valuation expert on your acquisition team who understands the intricacies and idiosyncrasies of the property tax systems in the jurisdiction where the real estate is located.

Is the property's current assessment in line with its fair market value? How does it compare with assessments of comparable properties? How frequently is property reassessed? Will a change in ownership trigger a reassessement, either as a matter of law or local practice?

Keep in mind that the price you pay for the property will be strong evidence of its fair market value, so it's important to anticipate how this evidence will affect the property's assessed value.

Getting Personal

The manner in which the purchase price is allocated among various assets has significant tax implications. Your valuation expert can help you determine a reasonable allocation that ascribes value, when appropriate, to personal property--both tangible and intangible.

Although some states impose their property taxes on personal as well as real property, many others, including New York, do not. And even in states that have a personal property tax, intangible assets--such as trademarks, trade secrets, patents, or software--are exempt. In addition, the cost of personal property generally is exempt from real estate transfer taxes. So the extent to which the purchase price can be allocated to tangible and intangible personal property can have a big impact on your tax bills.

It's not unusual for buyers to conduct a cost segregation study prior to a major real estate acquisition. These studies identify costs that are properly allocable to personal property entitled to accelerated depreciation under federal and state income tax laws. By accelerating the buyer's tax deductions, a cost segregation can provide a welcome cash-flow boost.

A cost segregation study may have some value in reducing real property taxes, but keep in mind that real and personal property may be defined differently for property tax purposes than they are for income tax purposes.

For example, items affixed to the land--such as fences, light poles, sidewalks, and parking lots--are classified for federal income tax purposes as land improvements depreciable over 15 years. And certain types of wiring, lighting, flooring, and other assets may qualify as personal property that can be written off over even shorter periods. But these assets are generally considered to be part of the real estate for property tax purposes.

On the other hand, in New York and many other states, certain machinery, equipment, and related structures are exempt from real property taxes, provided they're not essential for the support of the building and are readily removed.

As part of the due diligence process, you should scrutinize property tax assessments and confirm that all assets are classified and valued properly.

Tips for Reducing Property Taxes

Your due diligence may also uncover opportunities for reducing property taxes going forward. Here are several places to look:

* Does the assessment include items that are more appropriately classified as personal property that's exempt from real property taxes?

* In states that tax personal property, are any assets being counted twice, once on the personal property tax rolls and again on the real estate tax rolls?

* Does the current assessment reflect current market conditions? Tax authorities are usually quick to reassess properties when the real estate market is booming, but they may not be as diligent in a declining market.

* Does the current assessment reflect the property's unique characteristics? Tax authorities often rely on mass appraisal techniques and focus on market-based valuation approaches that emphasize the values of comparable properties. In many cases, however, a commercial property's income-producing potential may be diminished by technological obsolescence or competitive pressures in its particular industry. These and other factors that affect a property's fair market value may provide a basis for challenging its property tax assessment. You should also investigate whether the property is eligible for tax credits or abatements, such as those available in "empire" or "enterprise" zones.

Do Your Homework

Real estate taxes are a big expense for commercial property owners. They're also a major source of government revenue, so you can expect taxing authorities to jump on any opportunity to increase your assessment. It pays to do your homework so you know what to expect and can identify opportunities to reduce your tax bills.

BY MARC WIEDER, CPA 

ANCHINt BLOCK & ANCHIN LLP