When a property is purchased at a price significantly below the current assessed market value, what impact can the sale have on the owner’s property taxes or on the taxes of owners of similar properties in the neighborhood? If the sale is arms-length does that guarantee a reduction in value and, as a result, a reduction in taxes? While a property that is purchased in an arms-length transaction will not result in a guaranteed reduction in taxes, it can be a significant – if not the primary factor – in obtaining a reduction. The most important question is how does the sale become the dominant factor and how can the sale be used to reduce a property owner’s taxes?
Before a recent sale will be given weight to support a value reduction for property tax purposes, the sale must be properly qualified as an “arms-length” transaction. Unfortunately, the term “arms-length” is not a scientific term and is not easily defined. The Appraisal of Real Estate defines it as “a transaction between unrelated parties under no duress.” The Property Tax Administrators Manual provides that it is a sale “between two parties, each of whom is seeking to maximize their gain from the transfer.” Both of these definitions are incredibly broad. Because of these expansive definitions, the tax court in various decisions has stated what qualifies as an arms-length transaction,[1] but it has never presented a comprehensive list of what elements it considers or deems necessary in determining whether a sale is truly arms-length.
Arms-length is also a significant term for appraisers. Appraisers work hard to verify sales with buyers, sellers, brokers, assessors, and other interested parties. They verify sales to ensure that the transactions are truly comparable to the subject of the assignment and they also verify the sales to increase the credibility of their valuation opinions. When an appraiser calls a buyer, seller, or broker to learn more about a sale, a standard question is, “in your opinion, was this sale arms-length?” The reasons for their opinions are equally important because a buyer and a broker may have different concepts of “arms-length.” An agent may say that it was not arms-length because it was sold to the seller’s neighbor, but the seller may say it was arms-length because he wasn’t going to give his neighbor a deal. After learning what the interested parties thought about the sale, the appraiser will examine traditional factors, such as whether the property was listed on the market, whether it was a related-party transaction, and whether there was an option that pre-determined the price. There is no one factor that dictates whether a transaction was arms-length, but a critical factor is whether the buyer or seller believes that they paid or received market rate. Appraisers know that buyers and sellers will frequently give their candid thoughts on whether they think they received a good deal, a bad deal, or a market deal.
The tax court has repeatedly stated that an arms-length transaction of the subject property is the best evidence of the market value. While such a sale may be the best evidence, the tax court will not necessarily find that the arms-length sale of the subject property is conclusive as to the value of the property. Simply stated, there are too many other factors that may influence the price of a recent sale. Oftentimes the tax court will look to other market sales to test whether the arms-length transaction of the subject property should be viewed with caution or if it is supported by the market. How well the property was exposed to the market and how close the sale is to the date of the assessed value are two other important factors.[2]
Significantly, the sale can occur after the date of the assessed value and still be relevant. In Gregorich v. County of Anoka, the Tax Court indicated as much:
It is well established that where there is a sale of the subject property in close proximity to the time of the assessment date and it is an arms-length transaction, that sale will be given great weight in determining value. And a post valuation sale, including a sale of the subject property may be evidence of the subject property’s value.[3]
The Tax Court holdings in general provide that it is more important that the sale occur in close proximity to the date of the assessed value, rather than whether the sale occurred before or after the assessment date.
Even if a recent arms-length transaction is not conclusive and is not the sole basis of value in a tax appeal, it can still play an important role. A property’s assessed value is presumed to be valid and to prevail in a property tax appeal the taxpayer must meet its burden to defeat the presumption of validity of the county’s valuation. To overcome the presumption, credible evidence must be presented. Credible evidence may include an appraisal, comparable sales in the market or, as the tax court has held, a recent arms-length sale of the subject property. When that presumption is rebutted with evidence of a recent sale, it then becomes the taxing authority’s burden to establish that the sale is not arms-length or that the sale price of the transaction does not reflect the actual market value of the property.
When a recent arms-length transaction exists, it is important for both sides to consider that sale carefully. There have been cases where the taxpayer presented market value evidence for a reduction in value, but because the taxpayer failed to distinguish the market value evidence from a recent higher arms-length sale price of the subject, the arms-length sale carried more weight and as a result the higher value was better supported. The importance of a recent arms-length transaction can be bolstered or diminished by supporting the sale with or distinguishing it from other market evidence.
The moral of the tax court’s decisions is that a recent arms-length transaction should not be taken lightly by either side. A recent arms-length sale should be considered compelling evidence of value, but it is not alone conclusive. Other factors such as, whether the parties believe the sale was arms-length, whether the sale occurred in close proximity to the date of value, whether the property was advertised to the open market, and how the sale compares to other market evidence should all be part of the discussion for determining the appropriate market value of a property.
