September 13, 2022
NYREJ: When a sale is not truly market value, it can help reduce your property taxes
A sale transaction does not always reflect the true market value of a property. The circumstances surrounding a sale transaction, when properly relayed to an assessor, can result in a significant reduction in property taxes.
Owners may assume that because they bought a property at a value higher than its assessment that they cannot obtain a tax reduction. This is incorrect; frequently owners can still get significant savings depending on why they bought their property. Numbers alone rarely tell the whole story, and there is no section on a deed to note a buyer’s underlying motivations. It is critical in tax certiorari law to understand the reason why a buyer paid the amount they did as this could reduce the tax burden. Some examples are explained below.
1031’s Lead to Significant Overpayment
One of the most prevalent reasons for inflated sales prices are 1031 transactions. Real estate professionals take advantage of 1031 opportunities regularly. Essentially, 1031 allows a buyer who recently sold a property to put off any capital gains from that sale if he identifies a property of “like kind” within 45 days of selling their own property. Buyers with “1031 money” are extremely motivated by a “use it or lose it” mentality. Owners will declare “I overpaid, but my 1031 was about to expire.” Potential purchasers often find out they have been aggressively outbid by a 1031 buyer, as buyers will sometimes pay double what a property is worth if a 1031 is involved. This mechanism has become so widespread that there are companies that exist solely to facilitate 1031 exchanges.
Inflation/Rate Increases are Pushing Buyers to Act
Inflation has impacted sales prices recently as well. There was a flurry of acquisitions by purchasers looking to buy before interest rates were hiked to curb inflation. When 80% of most purchase prices are predicated on borrowing, a forecast of increasing interest rates serves as an incredible motivation to get the deal done even if the price is above market.
The rush to lock in a rate or willingness to move forward with a low rate while current rates are skyrocketing drives up prices. Savvy buyers remember that it wasn’t too long ago when rates were double today’s rates and locking in lower rates is of tremendous value. This kind of gamble means sale prices are correlated to interest rates, not the actual market value of the property.
Prices Based on Change of Uses Do Not Reflect the Market
A prospective change in use is a scenario where a buyer pays not for what the property is currently worth, but rather what they believe the property can become. While the buyer may execute that plan, the property is not worth that amount in its current condition. The courts have ruled definitively on this issue. If a property was purchased for a different use, the sale price cannot be relied upon for tax purposes. This situation is becoming more frequent with mass closings of banks and, more recently, drugstores. Buyers are purchasing these properties with entirely new uses in mind. However, until the property’s use is actually changed, the property must be taxed as the outmoded bank, obsolete drugstore, etc.
User Purchases Result in Inflated Values
Another obvious over-payer is the user purchasing the property for their own business. When a company is looking to relocate and considering buying versus renting, this is an extreme motivator. The prospect of no longer paying rent is attractive for obvious reasons, but often it’s a multitude of factors that lead a user to pay more. When an owner is considering buying a building that they will spend more time at than their own home, they will overpay for convenience. A layout that matches their exact specifications or size corresponding to their need may incentivize a user to overpay for the property rather than pay more than the difference to update another property less well-suited. Other considerations impacting convenience may even come into play such as commuting time. A user, when they find a match, is incentivized to overpay as they are making a long-term business and quality of life investment, not a purely financial real estate transaction with the goal of an immediate return.
Many Sale Prices are Higher than Market Value
It cannot be overlooked that these different players are bidding against each other. The 1031 investor, the investor trying to lock in his low rate, the speculative use developer, and the user purchaser may be bidding on the same site and driving up the price even above an already artificially inflated price. For these reasons, the typical investor frequently does win the bid. Therefore, each sale price must be closely examined and, if influenced by these factors, it should not be used for tax purposes. Without consideration of these motivations, purchasers will be unfairly and inequitably taxed as compared to similar properties.
Brad Cronin, Esq., and Sean Cronin, Esq., are partners at Cronin & Cronin Law Firm, PLLC, Mineola, N.Y.
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Brad W. Cronin, Esq.
Brad W. Cronin is the founding Partner at Cronin & Cronin Law Firm. He has over 40 years of Legal Experience. Brad represents a cross section of many of the largest New York developers, property owners, national corporations, REITs and retail chains. He has extensive trial experience having successfully litigated and resolved high profile cases throughout New York State which has resulted in a number of landmark decisions in the field of Tax Certiorari.
Over the years Brad’s reputation for honesty and integrity has led to long term relationships with municipal assessment officials. His expertise and extensive experience along with his reputation has resulted in some of the highest property tax reductions in New York State.
Brad has been selected as a Who’s Who of Long Island Business News for the past 7 years in the fields of Tax Certiorari law and Real Estate Law. Each year Long Island Business News honors business leaders whose creative approach to challenges and positive results help to make Long Island better.
For over 30 years Brad has earned the highest rating awarded by Martindale Hubbell in both competency and ethics in his field. This is an honor bestowed on him by his peers for his professional excellence.
Brad is a columnist for the New York Real Estate Journal’s “Ask the Expert” quarterly feature discussing current real property tax issues. Some issues addressed are Hurricane Sandy’s effect on property taxes, Nassau County’s Disputed Assessment Fund, emerging market trends, New York’s property tax rates, and how your purchase price can affect your taxes.
Brad has been an invited speaker and participant on various panels involving different subjects affecting tax certiorari and valuation of property such as condominiums, environmental contamination, and reviewing changes in the tax certiorari field. As a member of the Nassau and Suffolk Condemnation and Tax Certiorari committees, he has worked to implement changes to facilitate the timely resolution of commercial tax protests.
Brad currently serves as executive member of the steering committee and served as Co-President of the Long Island Real Estate Group for three years. This organization has supported various Long Island charities, as well as real estate related projects, educational real estate programs and networking events. He is Cofounder of the North Shore University Hospital Department of Medicine Leadership Circle Committee and serves on the Village of Plandome Planning Board.
Sean M. Cronin, Esq.
Sean M. Cronin is a founding partner at Cronin & Cronin Law Firm with over 20 years experience. He specializes in negotiating tax certiorari matters for prominent developers, national REITs and tenants in Nassau, Suffolk, and Westchester counties, as well as the five boroughs. He is responsible for successfully reducing the assessments, and thereby the real estate taxes, on many of the largest properties in New York State thanks to his expertise in property valuation issues and knowledge of market conditions and demographics. His clients include developers and owners of all property types, including office buildings, industrial buildings, shopping centers and retail locations, restaurants, apartment buildings and condominium complexes, golf courses and assisted living facilities.
Sean is an Executive Board member and past Co-President of the Long Island Real Estate Group, a charitable organization created to support local communities. He is an Executive Board Member of Vision Long Island which advances more livable, economically sustainable, and environmentally responsible growth on Long Island through Smart Growth. Sean is an Advisory Board Member of the Viscardi Center and on the Board of Advisors of the Energeia Partnership. He is an active member of the Chaminade Lawyer’s Association and Real Estate Group as well as the Washington & Lee Alumni Association.
Sean is featured regularly in the New York Real Estate Journal’s “Ask the Expert” section and has been quoted in various publications, including the Long Island Business News and Newsday. He has been recognized by the Long Island Business News as a “Who’s Who in Commercial Real Estate” multiple times, most recently in 2023 and by the Long Island Herald as the Top Tax Certiorari Attorney in 2023.
