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Taking Advantage of your Tax Appeal

The decrease in home prices does have some advantages, one of which is the opportunity to challenge property tax assessments. Often I find myself seated at closing with a homebuyer who has purchased a property for far less than the county or city assessed value. While challenging a tax assessment after closing may not be the most exciting way to spend your time, it does have the potential to save you thousands of dollars.

In Maryland, if a property is purchased between January 1 and June 30, the new homeowner has 60 days from the settlement date to file an appeal. If the homeowner misses this 60 day window, there are two more options: an appeal within 45 days of receiving an assessment notice (typically every three years) or a “Petition for Review” by January 1 of any year. The initial review will take place at the Supervisor’s Level, which is typically an informal, 15 minute meeting. If the homeowner disagrees with the decision, an appeal can be made to the Property Tax Assessment Appeal Board. If still dissatisfied, a further appeal can be made to the Maryland Tax Court. Here is the link to the Maryland Department of Assessments and Taxation, http://www.dat.state.md.us/.

In the District of Columbia, an appeal must be filed within 30 days of the date of the assessment notice (taxes are assessed annually) and it must be received no later than April 1. A new owner may file a petition for administrative review. The initial appeal can be conducted in person, in writing, or by telephone. If the disputed assessment can not be resolved, the homeowner can appeal for a Board level review, and if the homeowner is still not satisfied, a final appeal can be made to the Superior Court of the District of Columbia. Here is the link to the DC Office of Tax and Revenue appeals page, http://otr.cfo.dc.gov/otr/cwp/view,a,1330,q,594359.asp.

You should be prepared to provide comparables or other data to prove that the property assessment is too high. When appealing after a purchase transaction, a HUD-1 Settlement Statement or an appraisal may be helpful. Every property owner is entitled to obtain, free of charge, their property worksheet and a sales list for the area where the property is located. Most importantly, during the appeal, focus on the points that specifically affect the property value – do not argue about percentage increases, past values, or values of properties in other jurisdictions

Don’t be intimidated by the tax appeal process; typically at the first appeal level you will meet one on one with an appraiser in a non-adversarial setting. Also, most appeals are resolved at the first appeal, especially if you have done your research, therefore appealing to a review board or the tax court is not generally needed. So use your right to Tax Appeal, it’s not as difficult as it seems and the reward will be worth it.

Have you considered incorporating your real estate business?

November 3, 2008 Leave a comment

Have You Considered Incorporating
Your Real Estate Business

By Stephen J. O’Connor of Tobin O’Connor & Ewing

A corporation or limited liability company (LLC) can be formed quickly and efficiently by filing standardized documents with the appropriate jurisdiction. A corporation that, after being formed, elects to be taxed as a “pass-through” entity under Subchapter “S” of Chapter 1 of the Internal Revenue Code is known as an S corporation.

So, why should you consider forming an S corporation or LLC to operate your real estate business? There are two principal reasons.

1. First, each of these entities may protect you from personal liability for the debts and obligations of your real estate business. By contrast, a self-employed real estate agent (often called a “sole proprietor”) can be liable for damages and injuries caused by the business, such as a “slip and fall” incident. The sole proprietor real estate agent also may be legally responsible for the professional errors/omissions or negligent acts of other agents or staff he or she employs or engages. No liability-shielding entity, however, can protect your personal assets from debts and obligations arising out of your own professional errors/omissions or negligent acts.

2. Second, your overall income taxes may be lowered by choosing an entity to operate your real estate business. An LLC or S corporation, for the most part, is not subject to income tax at the entity level. Owners avoid “double taxation” by paying income taxes on the profits of the LLC or S corporation on a flow-through basis like a sole proprietor. While an LLC with just one owner (or “member”) is disregarded as a separate entity for tax purposes (and therefore treated as a sole proprietorship), an LLC with multiple members can allocate profits/losses in any way they choose. In an S corporation, shareholders must receive dividends in proportion to their shareholdings, regardless of the amount of time or effort they “invest” in the business. The biggest tax advantage enjoyed by S corporation shareholders is that they pay employment taxes (FICA and Medicare) only on money received by them as wages or salary, but not on profits or dividends (a savings of up to 12.4% compared to an LLC or sole proprietorship). LLC members typically pay employment taxes on the entire amount of LLC profits (regardless of whether or not the profits are distributed to the members).

There are several noteworthy distinctions between an LLC and an S corporation.

For instance, an LLC is not required to hold meetings or to keep formal minutes, while an S corporation may be required to do so. Owners of an S corporation are limited to a maximum of 100 stockholders and cannot include nonresident aliens or other entities, while members of an LLC have no such restrictions. Stockholders of an S corporation may deduct “pass-through” losses only to the extent of their actual investment in the company, while members of an LLC may deduct “pass-through” losses not only up to the amount of their actual investment in the company, but their proportionate share of the company’s borrowings as well.

If you are considering the formation of an entity to operate your business, you will want to organize the entity in the jurisdiction (i.e., Maryland, Virginia or the District of Columbia) in which you operate your business (not necessarily where you reside). This may eliminate the need to file tax returns in multiple jurisdictions relating to the business.

Lastly, an LLC is the definite choice of entity to hold your rental real estate. Since rental income is not subject to employment tax, an S corporation is of no avail for this business purpose.

For more information on planning your business, forming an LLC or S Corporation, please contact Stephen J. O’Connor at Tobin O’Connor & Ewing, 202-362-5900.