What every commercial and residential real estate broker needs to know about property taxes - by David Wilkes

Real estate brokers – for both commercial and single-family residential properties – often regard property taxes as potential deal-killers for one of two reasons. In the first scenario, based on potential sale value, the current property taxes are exorbitantly high, turn away would-be buyers, and lessen the property value. In the second, the tax assessment is significantly lower than the likely sale price and the buyer fears that the tax assessor will promptly increase the assessment once the sale closes. In either case, uncertainty gets in the way of the sale, and solutions don’t seem available.

“Location, location, location,” is the broker’s well-known refrain. The answers to all questions about tax impact are likewise to be found in the location of the property. New York State’s property tax scheme operates somewhat differently from one municipality to another, and making assumptions based on past experiences in other locations can lead to big mistakes.

A key distinction the broker must determine is whether the local jurisdiction reassesses all property annually or simply carries forward assessments from year to year (as in the majority of New York State outside of the boroughs). 

The buyer of an improved property who pays far more than the assessed value need not be overly concerned about a sudden tax assessment hike in a jurisdiction that does not regularly update its assessment roll. The assessor’s hands are legally tied. However, in a municipality that regularly revalues its assessment roll, that same purchase decision will catch the eye of the tax assessor and might flag the property for an increase. 

But, isn’t reassessment following a sale a case of illegal selective reassessment? Perhaps, but not so easy to prove in court where the surrounding properties have also been reassessed and the assessor craftily avoids raising the assessment to the precise sale value. 

Also, while an arm’s length sale is considered the best indicator of true value, not all municipalities view sales the same. In New York City, for example, commercial sales don’t often factor into the assessment process. Outside of the city, on the other hand, a sale can become quite meaningful, whether the owner is challenging the assessment or the assessor is considering an increase. Either way, if you believe the sale may be relevant to the assessment in a particular jurisdiction, ensure that the nature of the sale is properly documented: whether arm’s length or affected by any unusual factors, make sure the transfer documents say so. No one likes to find themselves arguing to disregard a sale only to have the assessor point out that the parties themselves claimed it sold at arm’s length.

There is often a fairly persuasive argument to be made for a reduction where an arm’s length sale is lower than the assessment. But, where the sale is much higher, and nothing can be said to disregard the sale, the buyer’s options are more limited. In some municipalities, it may make sense to proactively meet with the assessor in advance of publication of the assessment roll, discuss her intentions, and attempt to negotiate. Occasionally, such as where you can show that the sale occurred following the annual assessment valuation date, an assessor may agree to defer the increase for a year – a valuable delay during which a tenant can be secured to fill vacant space and shoulder some of the tax burden.

Know the mechanics and nuances of the local property tax system well and you will be well-armed to advise your clients on likely outcomes that prevent surprises and close sales.

David Wilkes, Esq., FRICS is managing attorney at Wilkes Law Group, PLLC, New York, N.Y.