Financial Advisors Can Help Clients Control Real Estate Taxes

Financial advisors are trusted financial professionals whose clients trust them for smart and tailored investment advice. Their clients are looking for and insightful, intelligent, and research-based investment strategies and recommendations.

"The real service a financial advisor offers today is not the product—it is you and your ability to make a difference in your clients’ lives. It is the questions you ask rather than the products you recommend that will distinguish you from your peers and increase your bottom line."

This quote was part of an article "Questions Great Financial Advisors Ask" that was published on the Institute of Business & Finance's website.

"A great doctor would not merely ask patients what they think. He or she would tell patients what they should do. As a financial advisor, you should do the same."

When meeting with your clients, I am sure you go over the clients' holdings and the investment returns. You and the client evaluate the performance. I am sure you ask if anything has changed since you last met. It goes without saying that you carefully and actively listen to your clients' responses and answers. If the client mentions real estate assets, then the client's real estate tax burden should be considered. After all, you consider the costs associated with investing in stocks and bonds or lending options.

For example, Ty A. Bernicke, CFP, who is an independent financial advisor with Bernicke & Associates Ltd., in Eau Claire, Wisc., identifies "six different costs ... expense ratio, transaction costs (brokerage commissions, market impact cost, and spread cost), tax costs, cash drag, soft dollar cost and advisory fees" to be considered when selecting a mutual fund. See Bernicke's 2011 Forbes article.

Real estate can be an integral part of an investment/retirement strategy. And real estate taxes can be a significant cost. You can help your client improve their return on the real estate investment by recommending they consider whether their assets are being fairly valued and fairly taxed. Refer them to a trusted professional who specializes in real estate valuation if there is no easy answer. There are some common scenarios that deserve immediate attention though:

1. Your client recently purchased real estate, whether a commercial investment property or a personal residence. Many jurisdictions base taxable value on a recent, arm's-length sale price. So, if there's been a purchase of real estate at a price lower than the assessor's valuation, the client might properly contest the assessor's valuation to reduce the real estate tax burden. This isn't axiomatic and a professional should be consulted before a challenge is filed.

2. Your client recently refinanced a mortgage loan. If they did, ask whether your client reviewed the bank appraisal report used in the application process. Banks appraise properties that will be their security on the loan. If the appraisal report concludes to a value lower than the assessor's value, the client might properly contest the assessor's valuation to reduce the real estate tax burden. Again, this isn't an one-size-fits-all scenario and a professional should be consulted before a challenge is filed.

3. Your client owns real estate in an IRA. IRS rules require that real estate assets held in an IRA must be valued. Adam Bergman, in his article "Valuing Alternative Assets In A Self-Directed IRA," states:: "Every IRA custodian is required to report annually to the Internal Revenue Service (“IRS”) the fair market value of each IRA it holds."

Equity Trust states that when the asset held in a self directed IRA is real estate, there are three (3) options to value the asset: "Request that a broker or other certified third party complete the Fair Market Valuation Form. This form does require a notary and signature by both the valuator and client... Order a Broker Price Opinion (BPO)... Order a Certified Market Analysis (CMA)." Many jurisdictions will consider these types of valuation evidence in determining whether the assessor has appropriately valued the real estate.

If the opinion of value already exists, why not use it to the client's full advantage!?

In each of these scenarios, there are follow up questions for the client. You can only add value to your services by recommending the client take action in these instances.