New Jersey Property Buyers Must Act Fast on Tax Refund Claims

A recent New Jersey Tax Court decision is a stark reminder of the rigidity of the statute of limitations for tax refund claims—and shows why attorneys in the state need to consider updating how they handle real estate transactions.

Buyers of New Jersey residential properties with a sales price exceeding $1 million have to pay an extra 1% tax, known as the mansion tax. The law governing the mansion tax also includes similar taxes on sales of commercial, farm, and cooperative properties for over $1 million. Unique to the law is the 90-day statute of limitations on refund claims—most refund claims have a four-year limitation period.

If a buyer were to discover a seller’s misrepresentation affecting a property’s value years after a sale, then sued and settled for the difference in the sales price and the property’s true value, they wouldn’t be able to recover the overpaid tax—at least not according to the ruling in DePina v. Dir., Div. In an unpublished decision, the Tax Court said allowing for an untimely claim for refund of tax to proceed would violate public policy.

In 2018, Tyler and Dina DePina bought a residential condominium for $1.07 million, paying $10,700 in mansion tax. The couple sued the developer two years later, alleging the distribution of “false and misleading advertising and related sales and marketing materials” and of making “untrue statements” on the property’s size.

The matter settled in 2022, and the DePinas submitted a refund claim for overpaid mansion tax the following year. After being denied, the couple filed a complaint in the Tax Court, which wouldn’t grant an exception.

Given the court’s ruling, New Jersey property buyers and their counsel need to consider strategies to prevent a similar outcome.

First, buyers should consider including a “DePina” clause in contracts involving the sale of property subject to the mansion tax. Such a clause may require a seller to indemnify the buyer for overpayment of such fees in the case of misrepresentation of a condition of the property, in addition to any other available remedies.

Also, there should be increased pre-purchase diligence, including full measurements of the property (the misrepresentation of which resulted in the DePina’s litigation); a request for all promotional materials related to the property; and comparison of the condition of the property, fixtures, and appliances against such materials.

In the case of litigation, it’s important to ensure that overpaid mansion tax and other fees in New Jersey Statute 46:15-7.2 are included in the calculation for damages, or in any settlement agreement.

If a property buyer’s tax is large enough, retaining some amount in escrow may be appropriate. But this may be a tough pill for sellers to swallow, as a DePina escrow implies the possibility of fraud on the part of the seller—never mind that the seller would be delayed in receiving the full sales proceeds.

The New Jersey Tax Court’s recommendation that the buyer file a protective refund claim may be problematic. It seems unlikely that most property buyers would discover misrepresented conditions within the 90-day statute of limitations, much less have any complaint associated with such misrepresentations even filed by then.

Therefore, it seems that the only way a property buyer can practically avail itself of the court’s recommendation is to file a refund claim immediately after the purchase, regardless of whether the buyer knows of any misrepresentation (filing a potentially unmeritorious claim).

If all buyers were to take this advice, the Division of Taxation would be inundated with thousands of protective refund claims, having to commit precious resources to process and track them. In addition to being a drain on state resources, as most of these claims would likely come to nothing, heeding this recommendation would generate additional transaction costs (the cost of filing, monitoring, and pursuing the claim if need be) and may cause buyers to forego pre-sale mitigation strategies.

The DePina decision should remind property buyers and their counsel that they may not be able to rely on fairness to recover overpaid fees under New Jersey’s mansion tax laws—they must determine the best form of protection. In this case, an ounce of prevention is certainly worth more than a pound of cure.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael Puzyk is tax partner at McCarter & English with focus on domestic and international businesses, organizations, and individuals in state and local taxation, with emphasis on New Jersey tax matters.

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