More “Changes” to the Land Use Change Tax

Owners of large parcels of undeveloped property in New Hampshire are most likely familiar with current use taxation of real estate.  In order to encourage preservation of open space, owners of parcels that exceed ten acres can submit their properties to current use taxation.  Once submitted, the parcel is taxed at a fraction of its fair market value.  Thus, the owner receives a lower tax bill until such time as the use of the property changes.  When the use changes, the property is said to be “taken out of current use.”  At that time, the owner must pay a penalty, known as “the land use change tax” which is calculated as ten percent of the fair market value of the property at the time of the change of use. 

Although the statute describing the method of determining the penalty is fairly clear, in practice, municipalities have taken dramatically different approaches to assessment of the LUCT.  By delaying the time when the assessment is made, municipalities could easily manipulate the amount of the tax.  For example, consider a fifteen lot subdivision on twelve acres of land.  Typically, development of the site would begin with clearing activities for the road which would stretch through the entire property.  The question is how much of the land is considered changed in use at that point in time for the purpose of calculating the LUCT.  According to the statute, the LUCT is assessed on “the number of acres on which an actual physical change has taken place…  and land not physically changed shall remain under current use assessment.”  In a traditional subdivision, this allows municipalities to assess the tax on a lot by lot basis as the lots are sold. 

In a September 20, 2007 decision, the New Hampshire Supreme Court took on this issue.  The case was the result of the assessment of the LUCT on a twenty unit, single family, condominium cluster development.  Like most developments of this size, the subdivision included a large parcel of open space required under the local ordinances.  Each of the unit owners would own an undivided interest in the open space lots.  Although construction of the roads began in December, 2000, the Town did not assess the LUCT until individual units were sold.  At that time, each lot together with the lot’s proportionate share of the open space was assessed the tax.  The developer paid the tax, but appealed the assessment asserting that the entire development should have been assessed the LUCT much earlier in the process when the road construction began.  

Somewhat surprisingly, the Supreme Court agreed with the developer.  The court first noted that the general rule of lot by lot assessment does not apply “when land, though not physically changed, is used in the satisfaction of density, setback, or other local, state or federal requirements as part of a contiguous development site….”  Since, in the example of the case before the court, the project included open space to satisfy the local ordinance, the open space is considered changed in use at the time construction begins.  In addition, since the open space is part of the “contiguous development site,” the statute treats the property and the open space as a single parcel of property regardless of the number of units approved for development.  Consequently, the entire “development site” is considered changed in use when construction begins.   The court also determined that the Current Use Board had no authority to change this interpretation by rule.  Thus, the benefit to the developer that took on the battle is an assessment presumably based on a lower fair market value resulting in a lower land use change tax.

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