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Property Tax Reduction via the Equity Method

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In Texas, property tax reductions can be negotiated in one of two ways: by demonstrating that the market value of a property is less than the appraisal district's proposed value or by demonstrating that the property is overvalued when compared to "a reasonable number of comparable properties appropriately adjusted".  This latter method of appraisal, commonly referred to as the Equity Method of Appraisal, takes precedence over the market value appraisal. 

Its intent is to ensure that properties are being valued in a fair and equitable manner with competing properties after adjusting for differences in the properties.  Consequently, newly purchased properties may receive property tax reductions below their purchase prices if they are being appraised inordinately high when compared to other properties.

There are several challenges in preparing an Equity analysis, one of which is the selection of comparable properties.  How many comps are "a reasonable number"?  This may vary depending on the property type and location, but seven to ten should be reasonable in most circumstances as long as they are the best comparables and located in the same county.

Since the law requires adjusting the comparables for differences between them and the subject property, we initially set our search criteria in such a way as to eliminate as much subjectivity as possible.  We search for properties relatively close to the subject that are similar in size, age and type of construction among other things.  Our intent is to find similar properties that compete with one another for the same class of tenants.  

If the “net we’ve thrown” doesn’t produce a reasonable number of comparable properties, then we’ll be forced to widen our search criteria which may involve trade-offs.  For example, we may have to determine if close proximity to the subject is more important than the size of the properties, amenities they offer and their physical characteristics or vice versa.   

Another analysis we perform is to compare the rents each property generates and the occupancies they’re able to maintain.  Of course, this involves obtaining this data from a reliable source. This analysis is separate for the one discussed above and its results are not combined with those of that analysis in order to prevent “double dipping”. 

“Double dipping” involves making an adjustment to a property’s value due to the higher quality of the physical characteristics of the property and then making a further adjustment because of the higher rents it generates.  The higher rents only attest to the higher quality.

Once the appropriate adjustments are made, the median per unit or per square foot value of the comparable properties is compared to that of the subject to determine if a property tax reduction is in order.

The final step to receiving a property tax reduction via the equity method is presenting the evidence to the appraisal district or review board in an understandable and convincing manner.  The appraisal district may employ a different approach or use a different set of comparable properties in its equity analysis which then will require a detailed review of its analysis and a comparison with ours.  

Valuation by the Equity Method can be complicated and time consuming but in some cases may be the only hope for a property tax reduction.

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Property Tax Advocates is led by the firm’s founder Jeffrey R. Burgher – himself a CPA and registered Senior Property Tax Consultant. A veteran of property tax consulting and appeal with twenty-five years of experience, he has become an authority and speaker on innovative property tax valuation methods.  Prior to founding Property Tax Advocates, he was co-owner and co-founder of First American Tax Valuation, Inc., Vice-President of Southland Financial Corporation, a Tax Manager with the predecessor of KPMG Peat Marwick and graduated with honors with a Master's Degree in Tax Accounting from the University of Texas. Mr. Burgher is a member of the Institute For Professionals in Taxation, the Texas Association of Property Tax Professionals, and the Apartment Association of Greater Dallas.

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Guest Thursday, 19 October 2017