Property Tax Reporting of Leasehold Improvements

Recently we have had a handful of clients experience unexpected tax increases when they receive their property tax bills. In examining the facts, we have determined that the state assessors converted the clients’ leasehold improvements from nontaxable, as personal property, to taxable. Since the notice of assessed value issued in June was not appealed, the client has limited or no recourse to reduce the taxes billed in December of that year and payable by the end of January of the following year.

In talking through the issue with some Wisconsin state assessors, they have said their policy is to assess to the person reporting the personal property until they perform their next detailed field audit (usually every five to six years). This can create overassessments when the leaseholds are items that are clearly taxed as real property (landscaping, parking lots, dock improvements, and carpeting) and may be repairs that add little or no new value to the real estate. When state assessors determine the adjusted value of the real estate during their audit, there is no credit for any tax erroneously assessed as personal property in the interim.

There are different classification standards for income tax reporting and property tax reporting, so no value should be assessed to tenants on leasehold improvements that are clearly classified as real estate.  If this occurs, the tenant needs to file a timely appeal of the notice they receive in May or June to contest any value assigned to these items. Therefore, it is very important to compare your self-reported values to the state’s values when you receive the notice.

While this focuses on Wisconsin, it could also apply in other jurisdictions that tax personal property. This is true especially where different parties (governmental bodies) or individuals may review the personal property rather than the real property.