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Look for Tax Savings in Hotel Personal Property |
By Mark Hutcheson, as published by Hotel News Resource, March 24, 2006
a major
component of hotel operating expenses, directly affect the bottom line success
of the property. As a result, a significant amount of attention focuses on the
valuation of hotels for property tax purposes.
The valuation process concentrates primarily on segregating the
going concern value of the hotel's entire business into real estate, personal
property and intangible value components. Frequently the personal property
aspects of the hotel get lost in the shuffle and the owner can suffer for
it.
They get lost in the shuffle because the typical hotel valuation
for property tax purposes starts with a consideration of the income attributable
to the entire going concern of the hotel. The income is segregated based on its
contribution from the real property, the personal property and the business
value intangibles. If both real and personal property are subject to property
taxes and intangibles are exempt, the allocation of income between personal and
real property becomes somewhat irrelevant. The reason is that the greater the
personal property value, the less the real estate value and vice versa, with the
result that the total property tax liability remains the same because the total
value remains the same.
Some situations exist, however, in which the total value and
resulting total tax liability will not remain the same. In such situations
special attention to the valuation of the personal property becomes warranted.
The following demonstrate some scenarios in which attention to personal property
values are particularly important:
- Many states do not tax personal property. As a result, the
value allocated to personal property under the income approach takes on
greater significance. If the personal property value is reduced the tax
liability of the property is reduced. Thus, the appropriate amounts of income
attributable to such personal property as replacements and return on
investment should be reviewed.
- A large number of taxing units use a cost approach to value
hotel real estate. Under a cost approach, the value of the personal property
cannot be taken as a direct deduction. Consideration should be given to the
appropriate useful life placed on the property and its market value at the end
of its life. This is important because hotel property may wear out more
rapidly than the schedule the taxing authority uses of personal property in
general.
- In addition to the typical deductions from income contributed
by personal property, as mentioned above, consideration should be given to an
additional deduction for income attributable to the specific rental of
telephones, rental of exercise equipment and rental of similar items. This
income may be characterized as income attributable to a business intangible
and, therefore, not taxable.
- Appraisal theory suggests that a hotel operator expects a
recovery of her investment in personal property as well as a payment for the
use of the investment, thus, a return of the investment plus a return on the
investment. Any income above this return on and of the investment in personal
property should be recognized as an intangible based on its value in use,
because the income emanates from the ongoing business and is, therefore, not
taxable.
Careful analysis of a hotel property's personal property using the
information provided here could well result in additional property tax savings
for a hotel property.
Mark Hutcheson is a partner with the Austin, Texas law firm of
Popp, Gray & Hutcheson, LLP. The firm devotes its practice exclusively to
the representation of taxpayers in property tax appeals and lawsuits. Popp, Gray
& Hutcheson is the Texas member of American Property Tax Counsel, the
national affiliation of property tax attorneys. He can be reached at
mark@property-tax.com.
