REAL ESTATE / TAXATION

How to Soften the Blow of
Land Use Change Tax

May 2002

By Michael D. Ruedig and Donald E. Gartrell*
for New Hampshire Business Review

Current use taxation in New Hampshire was designed to remove high property taxes from the landowner's budget so that there would not be a tax-based motive to sell or develop land. To achieve this, valuations for undeveloped land are set well below market values, lowering property tax assessments. The landowner applies for current use taxation, and assuming the land meets the general criteria, the next April 1, the tax bill goes down.

The price the landowner pays for this tax break can be very high. If the land use ever changes, the law imposes a "land use change tax" equal to 10% of the current market value. There is no statute of limitations or other time limit on this tax — it hangs over the property forever. This tax is secured by a lien, notice of which is recorded in the registry of deeds when the land goes into current use.

Take as an example, a hypothetical 50 acre tract in Concord. Current market values might be in the vicinity of $5,000 per acre, or $250,000 in total. Given the current tax rate of $27.34 per thousand, the annual tax bill would be $6,835. If the land were taxed under the current use system as farmland, in the mid-range at $200 per acre, then the tax bill would only be $273 — a significant savings. However, when taken out of current use, the owner at that time will have a $25,000 tax bill (or more, if the then-current market value has increased) that must be paid before clear title can be conveyed.

Even if the current owner does not plan to develop the property, the $25,000 liability looming eternally over the property, (which will only increase over time) will undoubtedly reduce market values if the property is ever sold.

Triggering the tax

Once in the current use box, there is no easy exit. Taxpayers cannot simply elect to take their land out of current use. Under RSA 79-A, the land use change tax is only triggered when:

• Actual construction begins on the site causing physical changes in the earth;
   
• Topsoil, gravel or minerals are excavated or dug from the site (with some exceptions);
   
• By reason of size, the site no longer conforms to criteria established by the Current Use Advisory Board.

Issuance of final approvals by the planning board does not trigger the tax. Only the developer's actions in commencing work on a project will trigger the tax. Timing of the tax creates tension between the owner and the assessor. Often, the town wants the tax stretched out over time, to tax future increases in value resulting from betterments and the market success of a project. A developer often wants the tax paid immediately for just the opposite reason. Each project must be reviewed carefully to plan the events that will trigger the tax in a way that minimizes or delays the impact. Topography, frontage, lot sizes and the like will determine the best timing for payment of the land use change tax — either at once or in increments stretching the liability over time.

Recent controversy over the land use change tax has focused on the impact of betterments. The issue here is whether the value of a road, utility system or other improvements in a project add value to the land for determining the land use change tax.

Going back to our Concord example, if the developer installed a $100,000 sewer line to the property, would the valuation be increased to $350,000?

Prior to February of 2001, the rules of the Current Use Advisory Board specifically excluded betterments in calculating value. In Appeal of Estate of Richard Van Lunen, the New Hampshire Supreme Court upheld the rule excluding betterments from valuation. However, on February 22, the Current Use Advisory Board changed its position and adopted a new rule, Cub 308.01, stating that valuation shall be based upon "... the highest and best use of the land, including the value of all betterments serving the land."

The Current Use Advisory Board also adopted a rule defining betterments, Cub 301.01, to include roads, water lines, sewage lines, utility lines or other physical improvements. This rules change will create substantially greater tax exposure, and has stirred some controversy. A legal challenge to the rule is expected.

In the meantime, great care must be taken in starting work on a project to avoid having ill-timed project expenditures for betterments drive up the land use change tax penalty.

There may be one bright spot. Depending on the circumstances, it appears possible that developers may be able to expense the land use change tax and deduct the amount on the federal return in the year it is paid.

In Sandy Lake Road Limited Partnership v. Commissioner, the Tax Court ruled that the Texas "rollback tax" (the equivalent of New Hampshire's land use change tax) was a real property tax deductible under IRC § 164.

There are numerous complex factors which, with proper planning, can be managed to minimize the impact of the land use change tax. Careful consideration and working with counsel and local assessing officials are essential to this process.

*Michael D. Ruedig is admitted in New Hampshire. Donald E. Gartrell is admitted in New Hampshire.

Return to top of page

Return to Real Estate Law Articles
Return to Taxation Articles
Return to Firm Publications