Exclude nontaxable intangibles from property tax valuations to help avoid overstated assessments and reduce tax risk.
Property tax assessments for complex real estate often capture intangible assets, such as brand value, management contracts, and embedded software, which should not be subject to ad valorem taxation. If these intangibles are not properly identified and excluded, valuations may be overstated, leading to higher tax liabilities and potential disputes. Proactively addressing intangibles is essential for compliance and effective cost management.
What are nontaxable intangibles?
Nontaxable intangibles are non-physical assets that contribute to a property’s income but are not taxable under property tax law. Common examples include:
- Brand and franchise value (i.e., hotel flags)
- Management and service contracts
- Software and proprietary technology
- Engineering and design costs
Legal precedents, such as Elk Hills Power LLC v. California State Board of Equalization and Rocksprings Val Verde Wind, LLC v. Val Verde CAD, establish that these intangibles must be excluded from property tax valuations.
Valuation methods for excluding intangibles
Industry professionals typically use two main approaches:
- Rushmore approach — Deducts management and franchise fees from net income to estimate intangible value. While simple and widely adopted, its accuracy for complex properties is increasingly challenged in court.
- Business enterprise approach (income parsing) — Separates income attributable to intangibles for precise exclusion. This method is more defensible in litigation but requires detailed financial analysis.
Compliance and risk management
Managing compliance and risk in this area requires a proactive approach. Owners and advisors should audit fixed asset records to identify embedded intangibles, such as software or engineering costs, and maintain clear documentation to support appeals. For complex portfolios, engaging specialists for professional valuation studies is often necessary. It is also critical to monitor state-specific rules, as the treatment of intangible assets can vary significantly by jurisdiction.
Industry-specific considerations
Different asset classes can face distinct issues:
- Hospitality — Franchise agreements and brand value are significant intangible components.
- Data centers — Proprietary software and network systems can inflate cost-based assessments.
- Senior living — Service contracts and goodwill require careful parsing.
- Entertainment and gaming — Licenses, trade names, and trademarks are key considerations.
- Retail, mixed-use, office, corporate campuses — Challenges range from marketing programs and goodwill to specialized buildouts and exclusive service agreements.
Actionable tips
To enable defensible valuations, start with a compliance review of your property tax filings and real estate assessments. Implement a standardized process for identifying intangibles and use case law and valuation studies to support appeals.
How CLA can help with property tax valuations
Excluding nontaxable intangibles from property tax valuations is a strategic move to protect your bottom line. CLA applies well-established valuation methods and builds robust documentation to defend your position, helping you mitigate tax exposure and risk while avoiding costly disputes.