June 22, 2015

Current Use Taxation: Traps for the Unwary

By Tenley Callaghan

As Phil Hastings noted in his recent blog post, current use taxation can create a trap for unwary buyers, sellers and developers of land.

Does this affect me? If you are purchasing property that is being subdivided from a large tract of land, or if you are constructing a new home or commercial building on land that has been in current use, or if you are selling a portion of your property, you should find out if this action will cause the loss of current use status for the property. If the answer is yes, a penalty (called a land use change tax, or “LUCT”) will be assessed.

Who pays this penalty? The parties should decide which party will be responsible for the LUCT payment during the negotiation of the purchase and sale agreement. Absent an agreement otherwise, the payment will be the responsibility of the owner of the property at the time the LUCT is assessed.

How much is the penalty? The LUCT is equal to 10% of the property’s value, and the timing of the assessment will directly affect the amount of the penalty. For example, if the land is subdivided before a building is constructed, and the town assesses the LUCT before construction, the town will be assessing the LUCT on a building lot. If the assessment is made after the building is constructed, the LUCT penalty will be much higher.

Will this be paid at closing? It is often the case that the town has not yet assessed the LUCT at the time of the closing. But the settlement agent at closing will want to collect funds to hold in escrow to pay the LUCT once assessed. This can result in a significant amount of money being needed at closing to cover the future payment. The settlement agent may request funds equal to 15% of the property’s future value to ensure enough is held to pay the LUCT. The funds may be held in escrow for many months, sometimes well over a year, as the town may not reassess the property until tax time the following year.

How can I protect myself? Prior to signing any purchase and sale agreement regarding property, consult with an attorney who can provide guidance on these and other issues regarding the risks involved in buying and selling property in New Hampshire. The real estate attorneys at Cleveland, Waters and Bass are happy to meet with clients and discuss how current use taxation might affect their property interests.