Real Estate Property Tax vs Other Kinds of Business Tax

If you’re coming into property tax from another area of corporate tax, you might think to apply the same tools, technologies, and processes to your new role. But property tax isn’t like other types of taxes. We’ll explore how it’s different in this post, as well as why specialized systems and tools are needed to manage it effectively.  

Real estate property tax can and should be managed

Managing your real estate property taxes is a core part of containing cost and maximizing operating efficiency. However, not all businesses have full visibility into their real estate taxes, and many don’t know what a management strategy should look like.  

There are three key components of real estate property taxes that must be managed:  

1. Values. Contesting the valuation of your properties can significantly reduce the property tax you pay on a given property and help you contain costs.  ‍
2. Cashflow. You have the ability to manage the timing of your property tax payments. For example, some jurisdictions will allow you to pay in multiple installments, or even offer a discount for paying early and in full.  ‍
3. Managing and mitigating risk. Proper management helps you avoid missing payments and incurring penalties, or missing appeal deadlines and forfeiting your ability to affect change.

Together, these options can help you manage your cash flow and contain costs across your portfolio. But you may still be asking: why is it so important to manage my real estate property taxes?

Real estate tax is often the largest operating expense for most owners and occupiers of multi-property portfolios

Real estate tax is the largest operating expense most owners and occupiers of multi-property portfolios will incur each year. To illustrate this point, the table below is a real example of the income and operating expenses for a 92,000 square foot multi-tenant office building. In it, real estate taxes make up 55% of the total operating expenses for 2021 – and this is consistent with what we typically see (I.e. real estate taxes making up greater than 50% of operating expenses).

It’s also interesting to note that real estate property taxes are grouped under Operating Expenses - unlike other taxes, property taxes are an expense that can be managed.

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Real estate tax is calculated differently than other taxes

Along with real estate property taxes being one of the largest expenses, it’s also calculated differently than other taxes. Property tax is based on the value of the owned property, including its land. This means your property value is a combination of factors including location, type, and size. What’s more, it means you’ll pay the same in property tax regardless of how your company performs.  

Conversely, other taxes (e.g. corporate, sales and use, etc.) are based on discrete inputs like profitability and sales. Thus, the amount of tax you pay is a direct result of how well your company performs financially, and you’ll pay less tax during periods of poorer performance.  

What's more, you don’t provide the inputs to determine what you owe in real estate taxes. Rather, your inputs are provided based on an assessment made by the taxing jurisdiction. Because real estate assessments and values are subjective, your property taxes can be contested. And real estate taxes require specialized systems to be managed effectively.

For tips on contesting your property valuations and managing your appeal process, check out these blog posts:  

- Identifying property tax appeal opportunities using technology  

- Three components of effective property tax appeal management

Most Tax Solutions Weren’t Designed for Real Estate Taxes

You may be wondering: why can’t you manage your real estate property taxes using Excel or the same tool you use to manage other business taxes? Since other taxes are typically not contested, it’s difficult to effect change for these types of taxes. As such, other systems aren’t designed to help you manage an operating expense like real estate tax.

Within your property taxes, there’s considerable opportunity for saving and tax mitigation. This can be achieved by analyzing data on an ongoing basis (and there’s a lot of data to analyze).  

Teams that effectively control their real estate taxes tend to rely on systems that offer sophisticated business intelligence tools. For instance, one key feature is the ability to look at year-over-year historical data. This has multiple benefits, as real estate teams can:

• Identify anomalies and opportunities in a portfolio, which can feed into appeal decisions
• Accurately forecast future liabilities and the timing of those liabilities with dedicated tools to trend forecast, budget, and cashflow  

No other system on the market has been optimized – or even developed – solely for the purpose of managing real estate taxes. As such, they don’t offer robust, specialized tools to manage it. For example, many tax solutions won’t allow you to view multiple years in a single location or dashboard), making trend analyses difficult. Without this capability, identifying appeal opportunities or tracking multi-year events becomes difficult or impossible.  

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Finding the right system to manage your real estate taxes

So what should you look for in a software solution to manage your real estate taxes? While this is a long list, below are a few key features:

• A centralized repository to consolidate property tax and related data, streamline sharing, and reduce manual processes
• Configurable reports and dashboards to analyze your portfolio, view forecasts and cashflow trends  
• A document management system to store and retrieve both digital and original tax documents
• Identify anomalies and opportunities in a portfolio to identify appeal opportunities
• Accurately forecast future liabilities and the timing of those liabilities

Are you exploring property tax software solutions? Check out our blog post 7 Questions to Ask When Selecting a Property Tax Software Vendor.

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