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How a Property Sale Can Affect the Right to Challenge a Tax Assessment

How a Property Sale Can Affect the Right to Challenge a Tax Assessment

Property taxes are an important consideration in just about every real estate transaction. If you are contemplating buying property, you want to have some idea of its assessed value and potential tax liability. You must also be aware of how prior or pending legal proceedings may affect your rights once you assume title to the property, as a recent decision by the Appellate Division, Second Department, illustrates.

Matter of ELT Harriman, LLC v. Town of Woodbury

Rutherford Chemicals, LLC, owned several parcels encompassing about 133 acres in the Town of Woodbury in Orange County. In 2006 and 2007, the Town assessed the land's value for tax purposes at just over $6 million. Rutherford disagreed with these assessments, arguing there was previously unknown “environmental contamination” on the property which reduced its market value.

In challenging the Town assessments, Rutherford commenced what is known as a “tax certiorari” proceeding in Orange County Supreme Court. After several years of litigation, the Town and Rutherford settled the matter in 2012. Under the order approved by the Supreme Court, the Town agreed to a reduced 2006 and 2007 assessment of about $2.6 million.

While the tax certiorari case was pending, Rutherford sold the land to another company, ELT Harriman, LLC, in a “negative value transaction.” Basically, Rutherford paid Harriman to take the land (and its environmental cleanup) off of its hands. This transaction closed in December 2007. Despite the sale, Harriman was never a party to the ongoing tax certiorari case between Rutherford and the Town.

But in July 2008, Harriman initiated a separate tax certiorari case against the Town, this time challenging the property assessments for 2008. Harriman subsequently challenged the 2009 and 2010 assessments as well, all of which were for the original $6 million value.

Now once Rutherford settled its tax certiorari case with the Town—fixing the property's value at $2.6 million—that value carried forward to reduce Harriman's 2008-2010 assessments. But Harriman said that was still insufficient. It cited a 2011 appraisal showing the property's fair market value had fallen to just $400,000. So Harriman continued its separate tax certiorari cases.

In May 2012, the Town moved to dismiss Harriman's petitions, arguing they were barred under New York law. The Supreme Court agreed, and on appeal, so did the Second Department. As a general rule, the appeals court explained, once a court modifies the assessed value of a property, the new value “shall not be challenged for the next three succeeding” tax years. In other words, Harriman was bound by Rutherford's settlement for the three years after it acquired the property.

There are exceptions to this rule, the Second Department explained, “mainly involving revaluations of all properties on a municipal entity's assessment rolls, physical changes to the property, zoning changes, and other recognized exceptions not relevant” to Harriman's case. More to the point, the three-year moratorium holds even if the property is sold to a new owner during that period. To hold otherwise, the appeals court explained, would simply create a loophole which would “encourage sales to 'straw buyers'.”

Taxes Are Just the Beginning

Tax issues are just one legal issue you will face in dealing with real property transactions. That is why even in seemingly simple sales, it is important to work with an experienced New York real estate attorney. Contact our office today if you need to speak with an attorney immediately.

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