Real Estate Tax Exemptions and Effects on Closing
Julianne Bonomo is an associate at Lewis Johs Avallone Aviles, LLP concentrating her practice in real estate and commercial transactions. Before Lewis Johs, Julianne worked as an Assistant District Attorney for Nassau County. Julianne received her Juris Doctorate from New York Law School in 2014. While in Law School she participated in groups such as the Criminal Law Society, the Italian Law Students Association, and the Domestic Violence Project.
Contact information: jabonomo@lewisjohs.com
t: 212.233.7195
www.lewisjohs.com
When researching whether to buy or invest in real estate, one of the main issues for your client is to determine if this property is right for them. One of the initial questions should be how much will this cost? While the purchase price is the main factor, landowner’s taxes can play a critical role when deciding if one can afford the property. In New York and many other jurisdictions, tax exemptions can play a big role in lowering the taxes on these properties.
I. Types of Tax Exemption
Some common tax exemptions available to property owners are Veterans Exemptions, Senior Citizen Exemptions Star Exemption, Enhanced Star Exemptions, Municipal or Religious Exemptions. If a Government entity or religious group owns the property they are likely exempt from paying property taxes entirely. Each exemption has their own list of requirements that can be found on NY Department Taxation and Finance Homepage, under the subheading of property tax exemptions. Most taxing authorities have this information on their website. If a current homeowner qualifies for a particular exemption, it attaches to the property but belongs to that homeowner only. Once the property is transferred or sold, the exemption is automatically removed from the property. If the owner purchases a new property, they must re-apply and qualify for the exemption on the new property. Also, when a person who is entitled to an exemption no longer lives there or passes away, certain exemptions are suppose to be removed from the property. In many cases, the exemption is left on the property. This is a dilemma and presents an issue when the property is sold and the exemption for the taxes are restored on the property. Unfortunately, this usually happens after the property is sold and the amount of the restoration for the taxes will be placed on the new owner’s property tax bill.
II. Determining the Exemption:
When a person is interested in buying a home it is critical to determine what the current taxes are without any exemptions. In New York properties are assessed by the value of the property and the taxes are determined by the individual taxing authority.
It is important that the interested buyer determines if there are any exemption(s) on the property. If not this can leave that potential purchaser with the burden of paying a higher tax if they are not entitled to the exemption as well as having property taxes restored later on after title has passed to them.
Most exemptions are listed on the current tax bills. When researching the current taxes, an astute buyer will ask the current owner if they have any exemptions and should request a copy of the tax bill as verification. If this information is not provided by the current owner, the information can usually be found on most taxing authorities website or by simply calling and giving the address of the property.
III. There is an exemption on the property now what?
If you determine there is an exemption on the property, a few questions should be asked:
- Is the person who is entitled to this exemption living at the property?
- Is the person who is entitled to this exemption still alive? or;
- If government or religious entity, for what period of time are they entitled to this exemption .
IV. Preparing for the restored factor:
The monetary value of the exemption may not be able to be calculated with certainty. Also, the restored factor may never actually be placed back onto the tax bill. There are several ways an attorney can prepare for this.
One way can be simply putting a clause in the contracts of sale which must survive closing stating that if there is a tax exemption on the property, any restored factor that is restored back onto the future tax bill will be the seller’s responsibility to pay. The issue here is the restored factor can be reflected on a tax bill up to a year or two after the closing. What recourse will the new owner have against a previous owner for a contract that has been in all other aspects concluded? Good-luck trying to get the previous owner to pay.
Another alternative is the parties can enter into an escrow agreement and place money in escrow to pay any restored factor. The first step would be to establish the amount of money that may be restored in the taxes for the property. In order to determine this a few things will need to be established. First , who is the party that is entitled to the exemption? Second, when will this exemption get removed from the property? (ie, date of death of a person entitled to the exemption). Third, calculate the amount of the exemption and increase that amount by 20% for an extra cushion to protect the parties. Title companies are usually willing to assist the parties in this calculation. The escrow agreement should provide that the new owner will be entitled to the amount of the restored factor placed back onto the tax bill. The attorney for the party holding the escrow should also include a date in which the new owner must notify the Seller if any restored factor has occurred to avoid escrow monies sitting in the attorney’s escrow account indefinitely.
Lastly, if parties are not amendable to escrow agreements, a credit from the seller to the new owner with the estimated amount should be incorporated into the closing adjustments. It is good practice to enter into a side agreement between the parties, stating that the credit will suffice for the amount of the restored factor, if any.
V. Conclusion:
Restored factors do not always go back onto the tax bills. However, you don’t want to receive a call from a client a year after the matter has closed informing you that their tax bill contains a charge for a restored factor. Therefore, it is good practice to plan for this scenario. It is imperative for the Purchaser’s attorney to do their due diligence prior to entering into a contract to purchase so that their client is fully informed. Second, the attorney should set calendar alerts to monitor the file once the new tax amounts are billed. If an exemption is restored back onto the tax bill, the new owner should furnish a copy of the tax bill as proof. If the parties have prepared for this, the outcome should be easy. Either a credit was given already and there is nothing further to do, or escrow monies were held as a result of an escrow agreement entered into by the parties at closing. If the Purchaser’s attorney did not conduct its due diligence and prepare for this scenario, ask nicely, and maybe, just maybe, the previous owner will give you back the money.