LOS ANGELES—Conventional wisdom holds that property tax appeals in California are rarely necessary during an up real estate cycle. But conventional wisdom isn't always correct. As it turns out, now may actually be a good time to take a closer look at your assessment.

Most property owners assume their assessments, locked in by California's Proposition 13, are already the lowest they can be. What's more, many of these same property owners received assessment reductions during the past few years. But these reductions, called Proposition 8 reductions, are temporary and reflect the fair market value of the property as of January 1 each year. Here are a few key issues to be aware of in California—and note that some may be relevant to other states as well.

When Fair Market Value Is Lower Than Assessed Value

If your county assessor determines that your property's value has gone back up, the Proposition 13 base will be restored, plus inflation adjustments, and that valuation could mean a sizable jump for taxpayers who may have enjoyed a 25%–40% reduction in their property taxes at the market low point.

Yet while real property values have increased, there may be situations in which a specific property's full value hasn't been restored. Your county assessor hasn't necessarily studied each individual property and may not know, for example, the circumstances surrounding a property's economic or functional obsolescence.

If your apartment complex is in an area that has seen an increase in violent crime and your expenses include constant graffiti removal and full-time security, your full Proposition 13 value may still exceed the property's actual fair market value. If a new building next door diminished the sunlight, panoramic views, and rents you were able charge, your full Proposition 13 value may still exceed the property's actual fair market value.

There are many circumstances like these, and you may need to file an appeal to get the opportunity to demonstrate those facts to the assessor, and then to an assessment appeals board, to receive relief.

New Construction

Assessors in California can value construction in progress on a property as of January 1 each year, and new buildings are included in tax rolls as of the date of their completion. But actual construction costs can be higher or lower than the fair market value of the newly constructed building. For example, demolition costs to prepare for a site's new construction aren't included in the assessment, nor are adjacent road improvements or offsite mitigation costs that the project funded.

These factors, if they've come into play in your project, may be a matter to take up in an appeal. As development dollars—which had all but dried up a few years ago—are back in abundance, new construction is an important time to be aware of property values for tax purposes.

Buying a Company with California Real Property

In a company merger or acquisition, underlying real estate in the transaction—such as factories or warehouses—can be subject to a new California real property assessment. If those assets' values have increased since the last ownership change, the assessment and the taxes will also increase.

Additionally, the assessor doesn't usually have a clear purchase price for the properties. The assessor knows the company sold for $5 million, but how much of that was truly the real property assets? This may be another issue on which to appeal or, prior to appealing, to reach out to the assessor to discuss your opinion of value.

Business Personal Property

In the Golden State, business personal property returns are delinquent after May 7, and the appeal window is July 2 through September or November, depending on the county. Confusion often arises when the person assigned to prepare the returns is faced with a list of assets and an incomplete knowledge of what's assessable.

For example, embedded software in a piece of computer-controlled equipment shouldn't be assessed because it's exempt as an intangible asset. The logical but sometimes difficult next step is to determine the cost of the software so the taxpayer can subtract it from the reported costs and reduce the assessment.

Estate and Gift Transfers of Real Property

Care should be taken when gifting long-held property to heirs. Not all such transactions take property tax assessment into consideration, but they should, since there may be opportunities to exclude these gifts from reassessment.

For example, creation of LLCs, LLPs, or other legal entities that take title to real estate may provide estate or business advantages, but it makes gifting of that real estate ineligible to take advantage of California's parent-child exclusion from reassessment because qualification requires transfers between people, not legal entities. If the property hasn't been subject to an assessment in several years, the tax assessor's revaluing of the property as a result of the “transaction” can create a huge tax bill.

The Bottom Line

September 15 or November 30 are the deadlines for filing 2014–2015 real and personal property tax appeals in California. As you consider how to approach your situation, know that overlooked issues and missed opportunities can cost property owners more than they imagined. Unintended consequences are playing into more and more tax appeals, so it pays to understand the regulations and conduct diligent assessment reviews.

The scenarios described above are some of the more frequent yet still surprising instances that arise in property tax assessments and appeals in California, but they're by no means the only issues. And regulations vary from state to state, so individuals with questions should consult an advisor. As the recovery takes hold, property owners shouldn't presume too much with regard to valuations or tax appeals. It may cost you.

Mindy McLees leads Moss Adams' property tax practice, providing real estate owners and operators with real and personal property tax consulting and compliance solutions. You can reach her at (310) 295-3717 or [email protected]. The views expressed in this column are the author's own.