Possessory interest is the right and intent of someone to occupy or control a plot of land but does not include ownership of the land. An example is a long term lease where someone has the legal right to occupy a home or building and exclude others from entering yet that person doesn’t own the property, he or she has the right of possessory interest through rent or other consideration.
The nation’s biggest landowner is the government: federal, state, and local. Government land is a major source of possessory interest, particularly what is termed taxable possessory interest. In this case, the owner of the land is a non-profit or non-taxable entity. When the right to occupy the land but not own it is bestowed upon a taxable entity, the possessory interest also becomes taxable. This includes locations on government owned land such as ski resorts, camp sites, government employee housing, and more.
A caveat to taxable possessory interest is that the possession must be durable, independent, and the right to occupy may not be shared with another entity. The benefit to the possessor must be private and be worth more than the benefit to the public.
Valuing Taxable Possessory Interest
The Assessor can value the possessory interest by a variety of elements:
- Improvements
- Terms of possession and rent
- Permitted use
Generally it is the present assessed value of the possessory interest rights that is considered during the term of possession but the most common valuation method is that of capitalizing economic rent. Reappraisal can occur at particular times or events such as change of ownership or the addition of improvements (construction).
Who Pays the Taxes?
The entity or person in legal possession of the property on a certain date is responsible for the tax payment. Typically the lien date is January 1. The possessor as of that date will owe the entire fiscal year’s taxes on the property. If possession lapses before that date, the property returns to tax-free status.
The taxes are considered part of the local property tax base and help to pay for various public services, the same as property tax paid by the deeded owner of land with a home on it.
Possessor’s Responsibility
The possessor should make certain to notify the assessor’s office of ownership changes since the possessor is responsible for the taxes. If the assessor finds after the fact that improvements were made that should have triggered a reappraisal, the possessor will be stuck with a very high tax bill that includes penalties and something called “escape bills.”
The possessor must keep up with notifications to the tax assessor of changes in ownership and improvements. But don’t think possessory interest can be hidden. Each government agency is asked every year by the assessor for a list of information that includes the name, address, and more for each property. With both the agency and the possessor keeping track and notifying the assessor when needed, there should be no surprises come tax time.
Possessory interest is similar to future interest where all rights to the property legally are bestowed for a certain amount of time by the owner until an event, such as termination of a life estate (the grantee dying), returns the interest to the owner. The entity with future interest has no rights whatsoever to the property while the grantee has possession, contingent on conditions laid out in a contract. With possessory interest the owner or grantor never loses the rights or privileges of the property; the possessor pays for the right to occupy but does not have all rights and privileges bestowed upon him.
