The Real Deal on Property Tax Appeals and Federal Tax Changes: Insights from McGuire Sponsel

On a recent episode of the Real Estate Tax Playbook podcast, I had the pleasure of hosting not one, but two guests from McGuire Sponsel - David McGuire and Justin Gephart. What started with a lighthearted conversation about our shared appreciation for bourbon (Wild Turkey 12-year is my personal favorite) quickly turned into an informative discussion about property tax assessments and upcoming federal tax legislation that real estate professionals should keep on their radar.

Property Tax Assessments: When to Consider an Appeal 

With property values and assessments rising dramatically across the country (I experienced a shocking 75% increase on my own property tax bill last year), many real estate owners are left wondering when it makes sense to challenge these assessments. 

According to Justin, if you're paying $50,000 or more in property tax on a single property, it's worth having a conversation about a potential appeal. Economic factors from the past few years have created perfect conditions for successful appeals - COVID impacts, the great resignation, remote workforce trends, and fluctuating market cap rates all provide strong arguments against inflated assessed values. 

Industries particularly ripe for assessment challenges include: 

• Commercial office space 

• Retail (especially shopping centers) 

• Multi-family properties (depending on lease-up status) 

The Appeal Process and Success Rates 

What's particularly interesting about the property tax appeal process is that most jurisdictions offer an informal process before moving to formal appeals. This gives taxpayers an opportunity to negotiate directly with assessors before investing in costly formal appeals that require appraisals and higher filing fees. 

McGuire Sponsel's approach involves thorough pre-qualification of properties to ensure there's a legitimate argument before proceeding, which contributes to their impressive success rates. The average reduction they're seeing ranges from 10-40%, with some exceptional cases like a recent hotel in North Carolina where they achieved a remarkable 55% reduction (from $90 million down to approximately $40 million). 

Valuation Methods in Property Tax Appeals 

When challenging assessments, three primary valuation methods come into play: 

1. Income Approach - The most commonly used method (approximately 90% of cases), examining revenue trends, vacancy rates, and market cap rates over the past 2-3 years to determine if the income supports the assessment. 

1. Comparable Sales Approach - Typically used for owner-occupied properties where rental income isn't applicable, comparing the price per square foot to similar properties in the area. 

1. Cost Approach - Less commonly used, this method analyzes what it would cost to rebuild the facility compared to its assessment. 

Will States Eliminate Property Taxes? 

While there have been conversations in some states about eliminating property taxes entirely, David and Justin were skeptical about this happening in the near future. Despite ballot initiatives in states like North and South Dakota, the reality is that property taxes provide stable revenue for local governments, and any replacement (like increased sales taxes) would likely create other challenges. 

As David pointed out, "We can argue whether you agree, is consumption tax good, property tax good? Take that off the table. We know right now people are over-assessed on property tax." So rather than waiting for systemic change, property owners should focus on addressing their current assessments. 

Federal Tax Legislation on the Horizon 

Looking ahead, several key tax items are on the watch list: 

1. Bonus Depreciation - There's expectation that 100% bonus depreciation may return, potentially retroactive to January 20th as requested by the president in his speech to Congress. 

1. Interest Limitation (163J) - While this limitation is unlikely to disappear, we might see a push back to EBITDA (from EBIT), which would be significant for real estate holders with high depreciation numbers. 

1. Qualified Business Deductions - This remains a topic of interest in potential legislation. 

1. Overtime Tax Changes - There's been discussion about potential tax changes on overtime, which could affect hiring decisions for developers. 

The uncertainty surrounding these potential changes makes long-term planning challenging. As David noted, "We can look at where we are today, maximize the cash flow by minimizing expenses, be it property tax or something else, to then help us weather those ebbs and flows until we see some type of stability come back in where we can then start planning that five-year future mark." 

The Bottom Line 

If you're a real estate professional dealing with rising costs and tax uncertainties, now is an excellent time to evaluate your property tax assessments. While federal tax changes remain in flux, addressing your fixed costs through property tax appeals provides an immediate opportunity to improve cash flow. 

 Evan Ross is the Tax Director with Brown Edwards & Company based out of the Roanoke, Virginia office. For more information about Brown Edwards, visit our website linked in the podcast description. The Real Estate Tax Playbook podcast discusses all things real estate, providing timely and precise tax information to real estate professionals looking to grow their business and build their own customized tax planning playbook. 

To learn more about property tax assessments or to connect with our guests, visit the McGuire Sponsel Homepage, or check out the team bios for Dave McGuire and Justin Gephart.