There’s an old saying that you can’t escape from death and taxes. And one of those taxes is “property tax” which is the amount you will pay annually for your storage facility. While the concept of property tax may seem complicated, it’s pretty simple when you understand the format. So here’s a quick review of self-storage property tax from A to Z.
What is property tax?
American society is paid by a series of taxes, of which there are basically four types: 1) income tax 2) sales tax and 3) property tax. While we all know about the first two, those who do not own property know nothing about the third. You see, property tax is paid by the owner of real property (or personal property in the case of a car). The aggregate of all these taxes is what pays for government, police, and the vital structure that encompasses our society. And property tax revolves around two components: 1) the assessed value of the storage facility (basically what it’s worth) and 2) the tax rate. It’s paid annually.
Who sets the assessed value?
Since the tax rate is set in stone, the only variable in what you pay is what your property is assessed for. If your storage facility value is set at $1 million then you tax would be twice that of a property valued at $500,000. And the amount of value is set by the County Tax Assessor. Every inch of America falls into a county, and that’s the group that levies the taxes on property. The tax assessor’s office can be vast and in a large office building in huge cities, or simply one person inside a small building in smaller towns.
What can you do if you feel the value is set too high?
The law allows you to contest the value if you do not agree with it. This process is called “appealing” your assessed value. This is allowed one time per year, and those dates are published. When you get your tax assessment you can either do nothing (which means you agree with it) or you can file an appeal. When you do this, it leads to meetings and even a court appearance to determine who’s right.
What are the consequences of appealing the value?
When you appeal the value, you have some downside in the equation. And that’s because the assessor can either go up or down on the value based on what comes out at the hearing. So even though you want the value to decline, there’s no guarantee that it won’t go up instead. That’s a pretty big issue, and that’s one reason so few people contest the value. But if you are convinced that it’s too high and can back up that claim with an appraisal or a recent sale, then it might make sense to do it.
How else can you lower your property taxes?
Other ways you can potentially lower your property taxes are:
- Assign some of the purchase price to goodwill. Talk to your CPA about this concept. In some cases it may be appropriate to assign some of the purchase price to “goodwill”, which is generally not taxed by the assessor.
- Have a casual conversation with the tax assessor outside of an appeal. Many tax assessors have the opportunity to meet with them outside of a formal appeal process. You can often get the value slightly reduced in these meetings, but generally without any risk.
- Have the property located in an area that has a fiscally stable government. It’s a simple fact that counties that need money bad are more likely to push the envelope on valuations. If the area is in the black financially, it is less pressed to “find” money in valuations.
- Have good old-fashioned luck. It’s a part of life that sometimes you just get lucky. You can find some storage properties assessed at ridiculously low values for no reason other than good luck.
What do you budget for property taxes when you buy the storage property?
Here’s a key issue in buying a storage property: what is the assessed value vs. what you’re paying and what will the tax be when it goes up to what you paid. Because it typically will. If mom and pop were paying $5,000 per year on a property valued at $500,000 (assuming a 1% tax rate, but in some areas it can be as high as 10%), and you’re buying it for $1 million, then the tax rate in your budget needs to be $10,000 per year. Never use the seller’s tax amounts – you have to use the correct ones based on purchase price.
There are some services out there that will help you reduce your property tax, and they do it on a percentage basis of what you save. While you may be able to do some of these things yourself, these groups are more practiced than you are and have a better array of tricks and arguments. So you could consider hiring one of them if you like.
Property taxes on self-storage facilities are a given. But the amount can vary considerably and you have to understand where it comes from and what your options are to potentially reduce it. While we have no solution to “death”, there are some proactive steps that can be taken to battle “taxes”. This list will start you on that path.