Property Tax Appeal Tip #1: Why You Should File Your Actual Income

Recently a commercial property tax client of mine expressed surprise when I told her we'd fare better at the appeal hearing if I filed her federal income tax return schedule relating to the subject property instead of just her own summary of income and expenses.

The truth of the matter is that there are a whole slew of reasons to file the IRS schedule in preference to most any other form of record of income and expenses.

Here are the top 3:

1. Federal income tax returns are regarded as inherently reliable. Because they are signed and submitted under penalty of perjury, federal income tax returns--and all attached schedules--are generally treated by the local property tax personnel as authoritative.

2. Schedules for rental property--whether Schedule E or Form 8825--clearly identify the property and segregate income and expenses of the subject property from those of any other property. The tax assessor will have a higher comfort level in reviewing your federal income tax return than in looking at a pile of receipts whose origins--or ties to the subject property--may be dubious.

3. Line items and statements (footnotes) on your federal income tax return segregate depreciation, debt service, and property taxes, each of which must be omitted from treatment as an actual expense or converted to a millage rate and made part of a formula to solve for an unknown (in the case of current property taxes), thereby facilitating accurate use of the component information as evidence of property value on the income approach.

The bottom line on the decision of whether to include or exclude a record of the preceding year's actual income and expenses as part of your income approach to property value should take into consideration the three factors discussed above.

In some instances, actual income may be driven by factors which are not properly part of the County Property Appraiser's consideration, including intangibles which drive gross receipts in a world class shopping center or flagship hotel.

If it is too difficult to separate the income derived from the intangibles, you may want to go with imputed market income and omit the record of actual income--which in some instances may include proprietary information protected by contract or contra-indicated by competition in the marketplace of a closely-held entity.

But if you are appealing 4 or 10 or 12 units of multifamily residential property, give serious thought to including the actual schedule from the federal income tax return in lieu of the property owner's summary of income and expenses. Special considerations can be accounted for--or discounted for--in your pro forma income analysis or calculation of stabilized income and expenses, or selection of cap rate.
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