Deadline to Challenge Ohio Real Estate Taxes is March 31

Posted by David Lindner on February 18, 2011

Attorney Anthony R. Vacanti provides the following upate on Ohio real estate tax challenges:

Rock bottom real property values are taking center-stage in the today’s headlines, both nationally and in Northeast Ohio. Have you ever thought about your or your company’s real property tax liability in such a context? Have your or your company’s real property taxes gone down with property value? Understanding the process may help in determining if you should challenge the value attributed to personal or company’s real property.

The procedure by which property is valued for tax purposes is set forth in Ohio Revised Code Chapter 5713. Real property is taxed at 35% of its true value, which is referred to as the assessed value for property. The county auditor is charged with adjusting the assessed value of each parcel within a county every three years. There are two different evaluations that occur: “Reappraisal Year” and “Update Year.” The Reappraisal Year occurs every six years, and during the Reappraisal Year each parcel is viewed and evaluated based on market conditions. The Update Year occurs three years after the Appraisal Year, and involves re-valuing property without physical inspection. This is often done using computer-assisted modeling of value changes by neighborhood and type of property within the county. The value of property is based on its condition on January 1st of each year. Each County has a different Reappraisal Year and Appraisal Year.

The county auditor’s valuation of property may be challenged. Pursuant to Section 2, Article XII of the Ohio Constitution, real property is to be taxed “according to value.” Ohio Revised Code Section 5713.03 also requires that each separate tract of property be valued according to its “true value.” Section 5713.03 states, in relevant part, that “[t]he county auditor, from the best sources of information available, shall determine, as nearly as practicable, the true value of each separate tract, lot, or parcel of real property and of buildings, structures, and improvements located thereon.”

This begs the question:  How is “true value” of property determined? True value is equivalent to fair market value, which the Ohio Supreme Court in State ex rel. Park Investment Co. (1964), 175 Ohio St. 410, has defined as follows:

“The best method of determining value, when such information is available, is an actual sale of such property between one who is willing to sell but not compelled to do so and one who is willing to buy but not compelled to do so. In Re Estate of Sears (1961), 172 Ohio St. 443, paragraph 2 of syllabus. This, without question, will usually determine the monetary value of the property. However, such information is not usually available, and thus an appraisal becomes necessary. It is in this appraisal that the various methods of evaluation, such as income yield or reproduction cost, come into action. Yet, no matter what method of evaluation is used, the ultimate result of such an appraisal must be to determine the amount which such property should bring if sold on the open market. “

In sum, when property is recently the subject of an arm’s length transaction between a willing seller and willing buyer, the sale price of the property will constitute the value for taxation purposes. The determination of how “recent” a real property transaction has to be is determined on a case-by-case basis. Generally one year or less is a good rule of thumb, but the purchase price of property in a transaction occurring later may still be relevant. It is important to note that only the value of real property, not the value of personal property, is considered when determining real property value. It should be noted that an arm’s length sale may not be considered evidence of true value if the sale was not arm’s length, for example sales involving bankruptcy or lease-backs. 

When real property was not subject to a recent sale or such sale was not conducted at arm’s length, then an appraisal or other evidence may be necessary to challenge the county’s real property value applied to the subject property, especially when the market has drastically declined, as in today’s current economy. Generally, when a recent arm’s length sale is not available, there are three other property valuation approaches used in determining true value:

1              Cost Approach to Value – determines value by estimating the costs to reproduce the improvements to the property based on current prices of labor and materials;

2              Market Approach to Value – the value of the property is determined by analyzing recent sales of similar properties; and 

3              Income Approach to Value – the value of the property is based on the net cash flow that can be produced by the property, capitalized at the rate of return that would be required based on the risk associated with holding the property. 

Given the drastic decline in the real estate market and corresponding real property values, it may be beneficial to review your own industrial, commercial, retail, business, and/or residential real property tax liabilities to see if they have also declined. If you disagree with the assessed value of your real property, you may file a complaint with your local county board of revision.

A complaint must be filed with the board of revision by March 31, 2011. The complaint form is straightforward, and the county provides a form with instructions. A counter-complaint may be filed, and many times is filed, by the Board of Education where the property is located. This counter-complaint must be filed within 30 days after the Board of Education receives notice of the filing of a complaint. If a tax assessment complaint is filed and unsuccessful, the property owner has the right to file an appeal to either the Court of Common Pleas or the Ohio Board of Tax Appeals.

In considering if you will challenge the valuation of your or your company’s real property, you must keep in mind that March 31 will be an absolute deadline to file a complaint and failure to file by this date will result in a loss of your rights to challenge the 2010 valuation. The standard complaint form is referred to as Form DTE 1, Complaint against the Valuation of Real Property. Although the instructions accompanying the complaint indicate that certain non-attorneys may prepare the complaint and file it on behalf of a company, it is important to note that the Ohio Supreme Court has questioned the constitutionality of that provision, and has determined that in many circumstances having a non-attorney prepare the complaint may constitute the unauthorized practice of law, especially if the matter involves legal issues and would involve the questioning of witnesses, such as appraisers.  See, e.g., Dayton Supply & Tool Company, Inc. v. Montgomery County Board of Revision (2006), 111 Ohio St.3d 926, 927. Consequently, it is advisable to consult an attorney when filing a complaint. 

The material appearing in this article is meant to provide general information only and not as a substitute for legal advice.  Readers should seek the advice of their attorney or contact Tony at avacanti@bdblaw.com or 800.686.2825.

This article may not be reprinted without the express permission of Buckingham, Doolittle & Burroughs, LLP © 2011.

Using LLCs to Avoid Real Estate Transfer Tax

Posted by David Lindner on September 15, 2010

Ohio imposes a real estate transfer tax on property transfers that can be up to $4.00 per $1,000 of sale price depending on the county.  This tax is assessed by the county auditor at the time the deed is filed for record, unless the transfer falls within a statutory exemption.  The seller is responsible for paying the conveyance fee to the county auditor.  Although some states do not have any real estate transfer tax, others impose a transfer tax significantly higher than Ohio’s .4% maximum rate. 

To avoid the conveyance fee, some real estate sellers have taken the approach of holding the real estate in a limited liability company, then conveying ownership of the LLC to the purchaser instead of a straight conveyance of the real estate. With the LLC transactional structure, no deed is ever recorded, so the transfer tax doesn’t apply.  In fact, the real property never changes ownership, since the LLC remains the owner before and after the completion of the transaction—it is only the ownership of the LLC that changes. 

Some states, including New York, Michigan and Florida, have begun to close this LLC “loophole” by enacting legislation to impose a tax on the sale of a controlling instance in an entity, such as an LLC, that owns real estate.  Ohio, so far, has not. 

There are, of course, many factors to be considered when structuring a sale or purchase of real estate, and avoiding a transfer tax generally should not be determinative.  Nevertheless, participants in the current market are anxious to save money in any way possible, and the potential cost savings involved in the LLC deal structure should not be overlooked. 

Florida Homestead Exemption Filings

Posted by David Lindner on August 31, 2010

Attorney Jeffrey D. Weinstock of Buckingham Boca Raton offers the following concerning the Florida homestead exemption:

Florida homestead is one that has received much press in recent years.  In Florida, homestead can mean several things.  There is a "constitutional" homestead protection which exempts the entire value of one’s personal residence from the claims of most creditors as long as the residence is limited to ½ acre within a municipality or, if outside a municipality, up to 160 contiguous acres.

In addition, there are other financial benefits to filing for and receiving a homestead exemption on your permanent residence.  The homestead exemption would entitle most homeowners to a reduction of $25,000 from their property’s tax assessed value.  In addition, the homeowner is entitled to an additional exemption of up to $25,000 on the assessed valuation greater than $50,000 for all levies other than school district levies.

Of greater benefit (especially when property values are increasing) is the cap on increases in future real property taxes.  Florida’s Constitution limits the annual increase in the tax-assessed value of homestead property by the lower of 3% per year or the increase in the consumer price index.  When the residential real estate market in Florida is appreciating rapidly, this limitation can also substantially reduce your property tax liability.

Florida law prohibits a person who is receiving a tax exemption similar to the homestead exemption in another state from also receiving a Florida homestead exemption.  The actual language of the Florida Constitution provides that “not more than one exemption shall be allowed any individual or family unit or with respect to any residential unit.”  There are conflicting opinions as to what constitutes a “family unit” with respect to homestead. 

If a husband and wife own jointly titled property in Florida as well as another state and they were receiving a homestead exemption in that state, they would not also be entitled to a homestead exemption in Florida.  Florida property appraisers have been more assertive recently in determining whether applicants for the homestead exemption are also obtaining exemptions in another state which allows the property appraiser to deny the application for the Florida homestead exemption. 

In addition, it appears that there have been increased efforts to identify ineligible exemptions and levy fines as a result.  Although it may not be surprising to learn that there are criminal penalties for providing false information for the purpose of claiming a homestead exemption, there are also significant penalties associated with benefiting from an ineligible homestead exemption, which permits a county property appraiser to file a notice of tax lien against any property owned by that person in the county. In addition, the property owner must pay the property taxes plus a penalty of 50 percent of the unpaid taxes for each year and 15 percent interest per year.

Since there may be different situations and many variations in the manner in which one can have property titled, if you have any questions about whether or not you may be eligible for a homestead exemption in Florida, please contact one of our Florida attorneys.