Real estate transfer tax is a tax imposed by states, counties and municipalities for the privilege of transferring real property within a jurisdiction. The tax is sometimes referred to as real estate conveyance tax, mortgage transfer tax or documentary stamp tax, among other terms. Currently, 38 states impose some variation of a tax on the transfer of title to real property. Some states and localities use the transfer tax revenues for specific purposes, such as affordable housing. New York State first adopted its Real Estate Transfer Tax in 1968, while New York City enacted its Real Property Transfer Tax in 1959.
Attorneys and accountants need to be cognizant of the applicable transfer tax and advise their clients engaging in real estate transactions about the implications of the tax. All too often, advisors neglect to prepare the transfer tax forms, causing unnecessary delays in closings, or, worse, they fail to inform parties to a transaction of the impending liability. Typically, transfer taxes are payable by the seller. However, if the seller does not pay or is exempt from the tax, the buyer often becomes liable.
New York State
The New York State Real Estate Transfer Tax (RETT) is imposed on real property conveyances at a rate of $2 per $500 of consideration. For certain qualified transfers to Real Estate Investment Trusts (REITs) the tax is reduced to $1 per $500 of consideration. This reduced tax rate for REITs had been set to expire in late 2014, but was recently extended to September 1, 2017.
The RETT also applies to long-term leaseholds if the following conditions are met:
1.The leasehold, including renewal options, is for more than 49 years;
2.The lessee made or may make substantial capital improvements; and
3.The lease includes substantially all of the premises constituting the real property.
It should be noted that an option to purchase real property is considered an interest in real property. Therefore, an option to purchase real property combined with a leasehold right to use or occupy property is a conveyance subject to the transfer tax notwithstanding the length or provisions of the lease.
Where taxpayers often overlook the applicability of the RETT is in situations involving the transfer of a controlling interest in an entity holding an interest in real property. A controlling interest means 1) in the case of a corporation, either 50% or more of the total combined voting power of all classes of stock, or 50% or more of the capital, profits, or beneficial interest in the voting stock of such corporation; and 2) in the case of a partnership, trust, or other entity, 50% or more of the capital, profits, or beneficial interest in the entity. When the corporation, partnership or trust holds New York real property, the conveyance of a controlling interest of stock or beneficial interest is deemed to be a transfer of the underlying real estate for purposes of the RETT.
In expanding the scope of the 50% or more test, New York law requires an aggregation of transactions that are deemed to be a result of the parties acting in concert. Consequently, taxable transfers of entity interests can occur over a period of time. Transfers of shares of a corporation or interests in a partnership occurring during a three-year period are aggregated for purposes of evaluating the 50% or more threshold. Anti-abuse rules also dictate that a series of transactions intentionally timed to be more than three years apart, thereby purposefully avoiding the imposition of tax, may nonetheless be aggregated and subjected to the RETT. However, it is possible for transferors and transferees to disprove the presumption of “acting in concert.” The parties involved in the conveyance have the onus to provide supporting evidence demonstrating that each transaction was isolated and not part of a planned series of conveyances.
New York law exempts certain conveyances from the RETT, particularly those to Federal and state government instrumentalities. More significantly, New York excludes certain transfers that are in essence a mere change in ownership identity, but not a change in beneficial ownership. For example, a transfer of New York real property by tenants-in-common to a partnership in which each individual owns the same proportional share as held prior to the conveyance is not taxable. Similarly, a conveyance by a corporation to a wholly-owned subsidiary, from a wholly-owned subsidiary to its parent, or from a wholly-owned subsidiary to another wholly-owned subsidiary are all excluded from the transfer tax. It should be noted that in such situations a RETT return must be filed claiming the relevant exemption. The filing obligation is important because there are certain transactions where a transfer, for example by tenants-in-common to a partnership in which each individual owns a different proportional share, may be only partially exempt from the RETT.
In addition, other types of conveyances are also excluded from the RETT. For example, the transfer of real estate occurring without consideration and not connected to a sale is exempt from the transfer tax. Relief from mortgage indebtedness is deemed to be consideration, however, and thus would cause RETT exposure for such gifts. Conveyances by way of devise, bequest, or inheritance are not subject to the RETT. However, in transfers due to divorce or separation there is a rebuttable presumption that the consideration for the conveyance, the relinquishment of marital rights, is equal to the fair market value of the interest in the real property conveyed. Accordingly, there may only be a partial RETT exemption depending on the respective spouses’ ownership interests in the real property.
New York State also imposes an additional 1% transfer tax, called the mansion tax, on most transfers of residential properties of $1,000,000 or more. Unlike the RETT, the mansion tax is generally payable by the transferee. Should the transferee be exempt from the tax, the transferor would become liable.
New York City
New York City’s Real Property Transfer Tax (RPTT) is imposed on transfers of real property or interests in real property when consideration exceeds $25,000. The tax is assessed at a graduated rate ranging from 1% to 2.625%, depending on the classification of the property conveyed and the total consideration paid. Leasehold interests in real properties are potentially subject to the RPTT. However, if the only consideration paid with respect to the leasehold falls within the expansive definition of rent as defined by the New York City Commercial Rent Tax laws, the lease will not be subjected to the tax. The transfer of a controlling economic interest in real property, meaning a 50% or more interest in a corporation or partnership, is also deemed a taxable transaction. Furthermore, the City presumes that conveyances occurring within a three-year period are related and will be aggregated for the 50% or more test. The transferors and transferees have the burden of proving that a series of transfers are in fact unrelated, thereby avoiding the aggregation of the conveyances and the levy of the RPTT.
With regard to bona fide gifts and the devise of an interest in real property under a will, such conveyances are exempt from the RPTT. However, a deed given by an executor in connection with the sale of an interest in real property is taxable. Likewise, a transfer of real property from one spouse to the other, pursuant to the terms of a separation agreement or divorce decree, is subject to the RPTT.
If you have any questions regarding the RETT or the RPTT, please contact Alan Goldenberg, Manager of Tax Controversy and State and Local Taxation, at firstname.lastname@example.org or 212-897-6421, or your Friedman LLP tax professional.