There are procedures hotel owners can follow to ensure they are paying their fair share on their assets’ business personal property taxes.
Unlike more “pure” real estate assets, such as apartments or office buildings, hotels require a significant investment in tangible personal property. Also unlike real estate assets, tangible personal property assets are rapidly depreciating assets that need to be constantly replaced and/or upgraded. This process requires a lot of bookkeeping in terms of a fixed-asset detail, which is typically maintained primarily for federal income tax purposes; however, this same fixed-asset detail is the basis for business personal property taxation.
Personal property taxation is a self-reporting process whereby the taxpayer files a business personal property tax return, based on the books and records of the owner. The taxpayer discloses the year of purchase of the asset and the cost of acquisition. The jurisdiction then depreciates this original cost, according to their own depreciation schedules, to arrive at an assessment or taxable value for the business personal property.
The issues arise from how well the books are maintained. For property taxation purposes, the books need to reflect what is actually in place, in use, at the property. If case goods were replaced one year but all the existing furniture still remains on the fixed-asset detail because it was not fully depreciated for federal tax purposes, there is potential to double report the amount of personal property that is in use at the property. These assets that remain on the books but are no longer in use are called “ghost” assets. It is important for business personal property taxation purposes to remove all ghost assets.
Another issue to be aware of when completing business personal property tax returns are items that for state and local taxation are actually real estate items but are classified as shorter-lived assets as allowed by federal income tax rules. This typically happens if the owner has a cost segregation study post acquisition which reclassifies building components to shorter lives to accelerate depreciation benefits for federal income taxes.
Not all states tax personal property, and most of the states that do tax business personal property tax it at the same rate as real estate. The effect of that for the taxpayer is it’s essentially a wash, because both real and personal property are taxed at the same rate, so in the income approach, once the net operating income is capitalized, the value of the personal property is deducted. It makes no difference whether it is taxed as personal property or real estate. This is not the case in Virginia, where the personal property tax rates are three to four times the real estate tax rate. If you own hotels in Virginia, it’s probably a good idea to carefully audit the business personal property tax returns to make sure they are as accurate as possible so you are not being double taxed.
Buyers in the marketplace should take care to not over estimate the value of the personal property in place that is part of the transaction. Oftentimes, if the property carries a flag, the buyer will be subject to a property improvement plan (PIP), and, depending on the extent of the replacements that will take place usually over the 12 months following acquisition, the furniture, fixtures and equipment in place will mostly be disposed. There will be plenty of depreciation to allay federal taxes.
The management of the property tax line item in the fixed expense category focuses mainly on real estate taxes, but it might be worth one’s while to take a more careful look at the business personal property taxes. Whether the property’s controller is completing the personal property returns or an outside consultant is preparing the returns, ask about the process to determine if anything is being done to “scrub” the fixed asset detail, remove ghost assets, identify short-lived items that are not personal property, and make sure all disposals have been recorded. If all of these things have been done, the business personal property taxes are probably as fair as possible. If these things have not been done, you might find it worthwhile to file amended returns and receive a few refunds.
Bernice T. Dowell is the president of Cynsur, LLC and a former senior manager of Paradigm Tax Group. She has focused her career in real estate transfer and property taxes on hospitality assets and the concept of removing the value of intangibles from a going concern. She began this endeavor as an employee in Marriott International’s tax department in 1991. While at Marriott, she was a member of the inaugural class at George Washington University for the masters of science in finance program and focused her senior thesis on the topic of hotel investment analysis and the contributory value of a tradename to a going concern.
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