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Transfer Tax - Window of Opportunity



November 20, 2007

The time between now and February offers property owners a window of opportunity to seek changes in their property tax classifications that can result in significant savings in transfer taxes.

Tax assessors are required to list a property tax classification for each property on the tax rolls. The tax rolls are finalized at the beginning of each calendar year, depending on how quickly the tax assessor completes his or her work. Historically, the classification was irrelevant to taxpayers. Not anymore.

Transfer tax has long been imposed upon all property sales, with a few exceptions. A couple of years ago, the legislature increased the transfer tax rate and amended the law to impose a new, additional one percent tax on the sales of residences, provided the consideration paid is at least one million dollars. (Once the one million dollar threshold is met, the tax is payable on all the consideration paid, not only on the portion above one million dollars). This tax is commonly called the mansion tax.

Last year, the transfer tax law was further materially expanded, in two ways. First, the mansion tax was extended to property classified by the tax assessor as Class 4A, “commercial property.” Additionally, a one percent tax was imposed on non-deed transfers of a controlling interest in entities owning Class 4A property, subject to the same one million dollar threshold as the mansion tax and provided that real estate comprises twenty percent or more of the value of the company’s assets.

As you can see, the tax assessor’s classification of a parcel of property as Class 4A property can have a big tax impact on commercial transactions. Property classification is not the same as zoning classification. Industrial property, vacant land, and apartments are not Class 4A. It is up to the assessor to classify a parcel, and the assessor can make mistakes or display questionable judgments. For example, assessors sometimes lump a parcel of vacant land (Class 1) with an adjoining parcel used for commercial purposes and put all the property in Class 4A. Similarly, mixed use property consisting of apartments and retail might be listed as Class 4A when it arguably should be Class 4C. A flex building with some office space but mostly used for industrial purposes might be listed in Class 4A but would more accurately be listed in Class 4B. There are many other examples.

Before the tax rolls are set early in the year, property owners have an opportunity to approach their assessors informally and request re-classification. Classification of property does not affect a property’s assessment in any manner, so the town’s ratables are not impacted by re-classification.

Once the tax rolls are set, a taxpayer can change the classification only by a tax appeal or other legal proceedings. Thus, the window is open now to get your property classified out of Class 4A without the cost and exposure (to a town’s cross appeal) of a tax appeal.