Investors in multifamily real estate may be overstating property values—and paying more in taxes as a result—by failing to separate intangible assets from the real estate itself.
That oversight can lead to missed opportunities to reduce property tax burdens, according to Todd Jones, principal and CEO of RealAdvice, who spoke Tuesday at the GlobeSt. Multifamily Owners Summit in Tampa. Jones said many owners and investors do not fully account for the distinction between taxable real estate and non-taxable intangible assets when valuing properties, even though the difference can materially impact assessments.
"Intangible assets aren't taxable," Jones said. "When you are buying or selling, there are hidden savings."
Part of the challenge, Jones explained, is that federal tax law and state property tax rules often treat assets differently. Investors who fail to recognize those differences risk applying the wrong framework when evaluating a deal or appealing an assessment.
"You are playing tag or tackle, and you better know which one you are playing in game form, otherwise someone is going to get hurt," he said.
Jones pointed to personnel costs as a common example of how value can be misallocated. While staffing is typically one of the largest expenses on a property's profit-and-loss statement, employees themselves are not considered real estate. The value associated with management and operational functions, he said, can often be separated from the taxable value of the property.
Other components, including in-place leases and tenant relationships, may also qualify as intangible assets and warrant separate treatment. Failing to distinguish those elements can inflate a property's assessed value and, in turn, its tax bill.
"There are many intangibles you find in a multifamily asset," Jones said. "There is a value to the leases in place. There is a value to the client relationship."
By properly identifying and allocating those intangible assets, owners may be able to lower assessed values and capture meaningful tax savings, Jones said, an approach that is especially relevant as investors look for ways to improve returns in a more constrained market.
"You need to capitalize on property tax savings," he said.
Check back with GlobeSt.com for more from the Multifamily Owners Summit event.
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