Can I sue town building department?

My first thought is that we should try to grandfather the property based upon the representations from the town tax collection office. Absent that, I am sure there will be a way for you to sell the property, based on your reliance to your detriment that this was an approved use by the town.

If you were already under contract (and it sounds like you were), you should have a closing attorney and that attorney should be able to explain the issues to you. This is a site for general questions, but this is a question you should be asking your current attorney. If you do not have a closing attorney representing you in the sale of your home, you should hire one. It is a rare situation in Connecticut where you can sell a house without the assistance of an attorney. Being out of state, you will want to have an Attorney who can go to the closing on your behalf. Zoning issues come up from time-to-time in Real Estate closings, and it is your attorney's job to "clear title." That includes addressing zoning issues if they arise. You should also take a look at your title insurance policy (or call the Attorney who you used for the purchase of the house) to see if this issue is covered there. This issue is too complex to be addressed in a forum like this. Call your attorney, or hire one if you don't have one already. But, just for fun, I'll mention some of the issues I spot here. If the "apartment" was built while you owned the home, without proper permits, it is still possible that you will be able to obtain the needed certificate of occupancy - but this might require stripping the walls down to the studs so that the town building inspector can take a look at the wiring, etc, to make sure everything is up to code. The fact that it was being taxed by the town suggests that proper permits were pulled and that the Certificate of Occupancy was issued. But this is merely an educated guess, without more specific information. Don't provide that specific information here. Contact your attorney, or - if you don't have one - find one and contact them directly. It is unclear what you mean when you say "Madison told the bank our apartment is not permitted." You might mean one of two things 1) either the building itself was not built with proper permits, and a Cert of Occ was not received, or 2) that the Apartment can only be used by the homeowner, and that it cannot be rented to a tenant. If it is the second, that might impact the valuation of the property, but it should not make it impossible to sell the home to buyers who want a guest house, want to have a parent live with them, etc. It is possible that the Buyer is bound to the contract - but that depends on the contract itself. Most contracts for the purchase of real estate in Connecticut have a mortgage contingency. If the "buyer couldn't get the loan" and the buyer's lawyer was doing his/her job, then there would have been a mortgage contingency, the mortgage commitment date has probably not passed, and the buyer can get out of the contract without forfeiting his deposit or paying damages. Though I am a Connecticut lawyer, I am not your lawyer. This post is for informational purposes only and cannot be relied on. You should speak to YOUR lawyer, and if you don't have one, you should hire one. Good Luck.

Just a guess but when someone abandons a residential use in favor of a commercial use (barbershop) they may have to obtain zoning approval to go back to a dwelling unit. Consult with your closing attorny.