ADVOCATING FOR PROPERTY TAXPAYERS - IT DOESN'T STOP WITH THE ASSESSMENT
ADVOCATING FOR PROPERTY TAXPAYERS---IT DOESN’T STOP WITH THE ASSESSMENT
Let’s begin with a simple and obvious reality-the vast majority of taxpayers who seek the advice of real estate tax professionals do so because they are unhappy with the assessed value of their property, the tax burden levied on the property, or both. However, lately, a new concern is becoming more and more prevalent among taxpayers and in particular, those who own investment-class properties. This concern is New Jersey’s so-called “Mansion Tax”.
To review, the “Mansion Tax” (N.J.S.A. 46:15-7.2) is a fee imposed upon the grantee of a deed to real estate which is classified for property tax purposes as either Class 2 (residential 1 to 4 family), any other real property conveyed to the same grantee in connection with the sale of Class 2 property regardless of classification, Class 3A (farmland if the property includes a building intended as or suitable for use as a residence), a cooperative unit, or property which is classified 4A (Commercial); AND the property is transferred for consideration in excess of $1,000,000. While the law as originally passed applied only to the transfer of residential property with price tags exceeding $1 million, in 2006, the law was amended to make it equally applicable to commercial properties bearing 4A Classification.
At one percent (1%) of the recited consideration, the impact of the Mansion Tax cannot be overstated. In a significant deal, potential liability for the tax can be a significant factor in the underwriting decision. Often, the focus on the Classification of the property to be sold is not scrutinized until a Purchase and Sale Agreement is signed, and in some cases not until the eve of closing. If the classification of the property is undeniably correct; .e.g. in the case of the sale of an office building bearing a classification of 4A, the tax is paid at time of closing. If, on the other hand, the property by its classification is plainly not subject to the tax; e.g., an industrial property classified 4B, this fact is certified in the Affidavit of Consideration and the tax is avoided. However, what happens if the property is misclassified? What happens if a 350 unit apartment complex is classified 4A?
Who Assigns the Property Class Code for a Given Property?
The Property Class Code is assigned by the municipal tax assessor and certified for each property along with the assessed value each year on or before January 10. The New Jersey Administrative Code provides broad definitions as to how certain types of property should be classified, depending on how the property is used, but the regulations provide little guidance as to how property should be classified when it incorporates two or more uses under one roof ( Ex. A 350 unit apartment building with a small café on the ground floor), or where the property improvements are of such a type that they could fall into one or another category depending on how they are used (Ex. a flex building).
In fairness, it must be stated that the Property Classification has absolutely no impact on assessed value. So, why worry about property classification at all? A property which should be classified as 4B (Industrial) but which bears a Classification of 4A, will be presumed to be subject to the Mansion Tax. Although an improper classification can be overcome post-closing by appealing to the Director of the Division of Taxation and ultimately litigating the issue in Tax Court, the tax is collected at closing, subject to refund if the taxpayer’s position is vindicated through this time-consuming and costly legal process.
A Better Way to Address the Issue
We are recommending to our clients that, rather than waiting until they are ready to sell the property to review the Classification assigned to the property, they review it with us now to determine if it is appropriate. In the event it is determined that the Classification is not appropriate, we believe that our clients are better served by appealing the Property Classification in the normal tax appeal cycle by filing a tax appeal with the County Board of Taxation on or before April 1 of a given tax year. A settlement of the issue would result in a judgment correcting the Property Classification which in turn would pay dividends down the road by eliminating the surprise of an inappropriate 4A Classification discovered on the eve of closing.
It is our recommendation that property owners, when they review the assessments of their properties annually, also review the assigned Property Classification. The Classification can be appealed at the same time the assessment is appealed or can even be appealed independent of a challenge to the assessed value of the property. We’d be happy to assist you with the review of your properties’ Classification and to explore with you the various options open to you to seek a change in Classification, where a change is justified.
Waters McPherson McNeill is interested in your comments and questions regarding our services. Please fill out the form below and we will respond as soon as possible. Thank you.
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