Year-End Strategies to Reduce Next Year's Property Taxes

With the end of the year approaching, property owners should consider available methods and procedures that might be implemented to potentially reduce the amount and liability for next year's property taxes.

The value of most property for Texas ad valorem tax purposes is established as of January 1. Therefore, the circumstances and characteristics of the property (whether real property or personal property) as of January 1 can be extremely important in the determination of the value of a particular piece or item of property.

Furthermore, January 1 is also the date on which liens to secure taxes assessed in the coming year attach to property. It is also the date on which personal liability for those taxes is determined. Though the tax lien attaches to the property regardless of ownership and regardless of any subsequent transfers of ownership, the January 1 owner of the property is the one who legally has personal liability for the taxes assessed.

The ability to change the circumstances and characteristics of property for ad valorem tax purposes is limited. However, there are some actions (and inactions) that a property owner can take prior to January 1 in an effort to reduce the amount of taxes assessed in the coming year and to possibly eliminate personal liability for some taxes. Some possibilities are addressed below.

Real Property

Deed restrictions - In some cases, the value of property can be determined based on special use restrictions that attach to the property as the result of the public filing of deed restrictions. For example, a property owner, who has undeveloped acreage of at least five acres that the owner knows will not be subject to development for a period of at least 10 years, can deed-restrict that property for recreational, park and scenic land use. With such a restriction in place and subject to other qualifications, the appraisal district must appraise the property based on its restricted use. A similar restriction might be imposed for public access airport property. While restricting the property does limit the ability of the owner to develop the property for the terms of the restriction, such restrictions have been used successfully by companies to lower the value of land held for long-term future expansion.

Transfer of title - There might also be a situation where an owner has a problem piece of property. For example, it might be unmarketable property left over from a completed development or a piece of property that is undevelopable due to terrain, easements, access, or other problems which make it too difficult or too costly for the owner to either improve the property or sell it. In such a case, the first option might be to determine whether the property can be transferred to an exempt entity, such as a city for park purposes or a church or charitable organization for some use. Absent the ability to transfer the property, the owner might consider setting up a separate shell corporate or other legal entity for the purpose of holding the property. For example, an owner could set up a separate corporation and transfer title of the property to that corporation prior to January 1. In such a way, the new corporation as the January 1 owner will have the legal obligation to pay any future taxes assessed. If the previous owner decides that he no longer wishes to maintain the property, he could have the new corporation not pay future tax assessments. Eventually, the taxing jurisdictions might take over the property due to delinquent taxes, thus relieving the property owner of the burden of the property.

Foreclosure property - In some cases, individuals or entities acquire a property through foreclosure only to later discover that there are delinquent tax liens (sometimes in excess of the value of the property itself). While the new owner has no personal liability for the back taxes, he will have personal liability for any taxes assessed in years subsequent to the year of foreclosure. To avoid such personal liability for a property with excessive tax liens, the purchaser should consider transferring title to a separate legal entity prior to January 1.

Transfer of excess land - Even in situations where an owner has land that retains value, he may want to consider transferring the property to an exempt entity, whether governmental or charitable. The owner could qualify for a federal income tax deduction. And, as long as the transfer occurs prior to January 1, the owner is relieved of any liability for future tax assessments.

Documenting conditions - Another tactic that the property owner should consider is documenting the specific conditions of the property as of January 1. While it is the conditions and circumstances of the property as of January 1 which determine taxable value, the appraisal district may not actually view the property until some months later. By that time, the condition of the property may have drastically changed. For example, there may have been significant improvements and upgrades to the condition of the property after January 1, whether a new roof, major reconstruction, or other. Documenting the condition of the property as of January 1, such as through the use of photographs or videotape, could be a great advantage in obtaining a value reduction when the appraisal district establishes its initial value based on a condition viewed on, say, April 1.

Document partial completions - Also, if a property improvement is still under construction as of January 1, then it should be appraised based on the partial completion. When the appraisal district inspects the property, however, the construction might be complete. It is important to be able to show the appraisal district and the appraisal review board the status of construction as of January 1 in an effort to prove a lower value.

Delay improvements - If a property owner is planning major improvements to the condition of a property, it might be advisable to delay such improvements until after the first of the year. Because value is determined as of January 1, improvements made after that date should not be considered in the valuation. For example, a $100,000 upgrade for roofing, carpeting, painting, paving, etc. completed in December might add $100,000 to the value of the property for the coming year. However, if that upgrade is delayed until January, then the $100,000 value might not be added until the following year. But remember to document the January 1 condition in order to show that the improvements did not occur until after the new year.

Business Personal Property

Dispose of assets - Many businesses often have unproductive assets that they have not yet disposed of, whether it is office furniture in storage or old computer equipment stacked in a closet. If these unproductive (or excess) asset items are disposed of prior to January 1, then they should not be included in the value determination of the taxpayer's personal property. Property owners should conduct an inspection of their personal property and make a determination of what they do and do not need. If there are any unproductive assets, then steps should be taken to sell the property, to donate the property, or if necessary to trash the property prior to January 1.

Scrub books and assets - Businesses also often retain on their records personal property assets long after such assets have ceased to exist at the business. A property owner should determine what property is actually still owned by the business, compare that information to the business's asset listing, and remove any outdated items from the records. This is especially important when it comes time to rendering personal property, as often the basis for the rendition is the property reflected on the books as of January 1 and not necessarily the property actually located at the site.

Delay asset acquisitions - If a major upgrade in assets is planned, such as a new computer system or expensive new office furniture, and the business will not suffer from a short-term delay, then acquisition of new assets might be postponed until after the first of the year. If the property is not owned by the business as of January 1, then it is not taxable to the property owner. By delaying acquisitions, even if only to January 2, the taxpayer can potentially avoid a year's worth of taxes on the new property items.

Delay receipt of goods - In some cases, a business might have purchased goods (whether inventory or other assets) from an out-of-state entity. If the receipt of these out-of-state goods can be delayed until after January 1, then the property should not be taxable for the coming year. The Texas Property Tax Code provides that personal property located outside of Texas for the entire preceding year and on January 1 of a tax year is not taxable in Texas during that tax year. Thus, if the new acquisitions do not arrive from out-of-state until after January 1, the acquired property is not taxable until the following year, even if the purchase transaction has otherwise been completed.

Determine location and situs - Some businesses with multiple locations (either within Texas or within the United States) might have all or most of their property booked at a single location, even if that property is not actually at that location. A taxpayer should determine where its property actually is on January 1 and then determine where that property is taxable. In some cases, the property might be taxable in jurisdictions with lower tax rates. In other cases, the location might not even be in Texas. There have been situations where taxpayers have rendered in Texas property never even located in Texas because it is the location of the corporate office. In other situations, property owners have rendered property found on the books of an office, but actually located in offices in other states. A property owner should try to determine the taxable situs of his property as of January 1 and not just assume that it is the location where the property items are booked.

Property Tax Deduction

Of course, a taxpayer should give consideration to the ability to deduct property tax payments on federal income tax returns. Texas property taxes do not become delinquent until February 1. Thus, many taxpayers choose to wait until January to pay the taxes. Depending on the accounting method used by the business, such a delay could result in the property taxes being properly deducted on the following year's federal return. To ensure proper deduction of 2004 property taxes, a cash-basis taxpayer should pay the 2004 assessments prior to January 1, 2005.

If you have any questions about the contents of this article, please contact the GPD Property Tax Section at propertytax@gpd.com.