Commercial v. Residential Property. When should property that is limited by restrictive real estate covenants to commercial use and barred from residential use and is located in a commercial development not be taxed as commercial property? When the taxpayer lives at the property in apparent violation of the rules. At least, that was the taxpayer’s recent argument in a Montana property tax appeal.
In Refling v. State of Montana, Department of Revenue[1], the Montana Tax Appeal Board determined on these facts that the taxpayer’s real property should be classified as commercial property rather than residential property for property tax purposes. The Board cited to USPAP manuals that require an appraiser to determine highest and best use of property. Legally, the Board concluded, the property could only be used as commercial property as set forth in the property’s governing declaration of covenants, conditions and restrictions. Therefore, despite the taxpayer’s nonconforming use, the property should be classified as commercial.
Practice Point. The taxpayer’s argument failed and the property was classified at a tax rate of 1.89% for commercial property vs. 1.35% for residential property. This results in a taxable value increase of $340.74, which equates to approximately $170 a year in additional property tax. No doubt the taxpayer undertook a lot of work for a relatively small possible payoff. The fact that the MTAB noted the amount of value at issue may indicate that the Board, perhaps subconsciously, put this ruling into the realm of “no harm, no foul”, knowing that the taxpayer was not taking a big hit if he lost. Certainly the amount at stake would only have covered a half hour of legal fees if legal counsel had been used. But credit to the tenacity of the taxpayer for asserting his rights, no matter how little was at stake.
Taxpayers disputing property taxation may contact Jared Le Fevre to discuss the merits of a property tax appeal.
About the Author. Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal, state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] 2021 WL 1878198 (Mont.Tax.App.Bd 2021.)