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November 2, 2021

Real Estate Tax vs Personal Property Tax: What’s the Difference?

Real estate property tax isn't like personal property tax. Learn the ways in which they differ and what your management strategy might look like for each.

The term “property tax” usually refers to real estate tax paid on a property. But there are different types of property and real estate that a company can own and they’re taxed differently.

If you’re new to property tax, you may think that personal property tax and real estate tax management are more or less the same thing. But as we touched on in a previous blog, real estate taxes aren’t like other kinds of business taxes. And real estate taxes are not like personal property tax, either.

What are real estate taxes and how are they determined?

Real estate property taxes, sometimes called “real property taxes,” are the taxes paid on your actual real estate (property) and can include both land and improvements/buildings. Your real estate taxes are determined by an assessing or taxing jurisdiction, who set the tax rate and assess your property based on a number of factors, such as location, type, and size.  Taxpayers don’t typically provide the inputs to determine the value of their property; instead, the value is determined by the assessing or taxing jurisdiction.  

What are personal property taxes and how are they determined?

Personal property refers to assets other than real estate. The key differentiator between personal property and real property is that personal property are tangible assets other than land or permanent structures.  

Thus, personal property could include property like office supplies and furniture, electronics, and machinery/equipment. It’s important to mention that personal property isn’t taxed all over the world; largely, personal property tax exists in the U.S. Even so, personal property isn’t taxed in all states, and the tax rate, categories, and items taxed can vary from state to state.

As we’ll explore, personal property taxes are more similar to corporate taxes, income tax, and sales and use tax than they are to real estate property taxes. That’s because you’re providing the jurisdiction with inputs to determine what you owe (where, for real estate tax, you’re typically told what you owe based on their own assessment/inputs).  

While it varies somewhat from jurisdiction to jurisdiction, the inputs you’ll provide to the jurisdiction to determine your personal property taxes may include:  

  • A list of business equipment, supplies, fixtures, etc. for each business location,
  • The categories each of the assets belong to (based on the state’s categorization requirements),
  • The date of acquisition, and
  • What you paid for those assets on the acquisition date.

This last point is key for determining the assets’ fair market value. The jurisdiction provides you with depreciation rates, which are used to calculate how much those assets are all worth, and what you owe. The depreciation rates will vary depending on the asset category and age of the asset.

Personal property tax vs real estate tax

The key differences between personal property tax and real estate tax are:

  • What’s taxed: Real estate taxes are based on your property, while personal property taxes are levied on tangible assets.
  • How taxes are determined: Real estate taxes are based on the value of the owned property determined by their own assessment, while personal property taxes are based on inputs the company provides.
  • The tax rate: personal property and real estate taxes have different tax rates, set by the jurisdiction and determined based on local criteria.  
  • How they’re contested: While each personal property and real property can be contested, with real estate taxes, you’re contesting the value. This can be a long, complex process because the value is somewhat subjective. With personal property, however, you’re contesting the categorization of the asset.  

You may be wondering: how does the amount of total tax paid compare between personal property and real property? Well, it depends on the type of portfolio. For heavy manufacturing companies (like steel mills, oil refineries, and pulp and paper), personal property tax will likely be higher than real property tax. Large hotels usually see a 50:50 split between real and personal property. But for the majority of property types, real property tax will be much greater than personal property tax.  

Identifying appeal opportunities for real vs personal property

The steps themselves for managing each of these taxes is similar, and both follow the property tax lifecycle (though the dates change from state to state). However, it’s the initial steps – prior to contesting the tax – that differ.  

For personal property tax, management is a highly manual, administrative process. It consists of:

  • Documenting and categorizing assets, including purchase year and initial cost
  • Completing forms for each state in which you have personal property  
  • Submitting documentation according to the state filing deadline Personal property is heavily deadline- and documentation-based. Because there’s so much variance from state to state, having the correct (and most current) forms and filing deadlines is key for management.  

The main differences in these initial steps between real and personal property is that you’re administering this annually and completing each year in isolation. For personal property, you really only need data from a single year (usually the current one) in isolation, as you’re only contesting the category.  

Conversely, to manage real property tax effectively, teams need a significant amount of historical data. During the review process, teams are analyzing data for their own properties as well as neighboring and similar ones. They’re looking at year-over-year changes and trends. That’s because for real estate property tax, appealing the value, rather than a simple categorization. As such, historical analysis is both necessary and complex, and large, long-term data sets are required. Similarly, specific software tools are required to effectively review this data and tease out opportunities.  

Managing real vs personal property through the property tax lifecycle

For each real property and personal property, the process they’ll follow will align with the property tax lifecycle:  

  • Assessment and Values Management: Receive and review property valuations for anomalies or appeal opportunities (real property) or for classification disputes (personal property)
  • Appeal Identification and Management: Identify and determine appeal opportunities, then file with the jurisdiction. Then, manage appeals through to close.
  • Tax and Expense Management: make payments to the jurisdiction and ensure adequate cash flow.
  • Forecasting and Budgeting: develop projections based on portfolio, appeal opportunities, etc. for the following year.  

Because real property taxes are produced, analyzed, and reviewed differently, it’s important to manage them using dedicated software. It’s only through specialized tools that teams are able to effectively manage the assessed values and property taxes levied.  

If you’re looking into software solutions, we recommend looking for a system that’s real estate focused first (rather than personal property), because real property is more likely a larger expense. Check out this article for tips on what to look for in a real estate tax software vendor.  

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© 2023 Rethink Solutions. All Rights Reserved