The state of New York imposes real property transfer taxes on the sale or conveyance of residential and non-residential real estate, which is a key consideration in real estate transactions. The state transfer tax (RETT) is 0.4% for properties under $3,000,000 and a much higher rate of 0.65% kicks in for sales over $3,000,000. NYC imposes an additional city transfer tax ("Mansion Tax") of between 1% and 3.9% of the purchase price. The new New York transfer tax rules will likely have a significant effect on the NY metro area as the COVID-19 pandemic continues to cause people to flee from crowded areas, like Manhattan, to more suburban areas.
As a result, the number of new home sales and pending home purchases will likely decline substantially in the coming months. As the number of transactions declines, the New York transfer taxes will generate significantly less revenue for the State and City. The State and City are trying to make up for the expected shortfall by increasing the RETT rates and imposing the Mansion Tax, thereby affecting the real estate market dynamics.
CPAs should be mindful of the increased transfer tax costs when advising clients on real estate acquisitions and sales. The new rates and Mansion Tax will be a major factor in decisions whether or not to sell or purchase a property. Moreover, the impact of transfer taxes on the overall cost of a transaction can be substantial and should be carefully considered in any financial planning related to real estate.
Generally speaking, the RETT is based on a formula that takes into account the selling price and the consideration paid for mortgages, other encumbrances that remain a lien and the assumption of any debt or obligation. The NYS and NYC transfer tax also applies to the transfer of shares in a cooperative apartment or condo, further extending the reach of these taxes in urban real estate markets.
Although there are some exemptions from the RETT and RPTT, virtually all transfers of real or economic interests in property in NYC are subject to the two taxes. The exempt transfers include those between parent and child, husband and wife, brother and sister and grandparents and grandchildren. In addition, transfers made in connection with a divorce or bankruptcy proceeding and to secure debts or obligations are also exempt from the tax, providing some relief in specific scenarios.
The transfer tax is a significant cost of doing business in New York. Unlike the sales tax, which is collected at the time of a sale and included in the gross proceeds of the transaction, transfer taxes are not deferred and must be paid by the seller at the closing of the sale. This immediate financial burden means that sellers often seek ways to mitigate the impact of transfer taxes, such as negotiating transfer tax credits with buyers to reduce overall transaction costs.
When a developer of real property decides to transfer the ownership of the property to another party, there may be tax consequences arising from both NYS and NYC that should not be overlooked. In particular, the calculation of the “consideration” in connection with a conveyance that is subject to New York State Transfer Tax (“RPT”) and/or NYC Real Property Transfer Tax (“RPTT”) may not be as simple as one might think. In addition, certain transfers of real estate are exempt from transfer taxes. This article discusses the transfer tax exemption criteria in New York and some of the specifics of transfer taxes applicable to commercial real estate.
The New York State Transfer Tax is imposed on “conveyances,” which is broadly defined in the law and includes sales, grants, assignments, surrenders, mortgage foreclosures, deeds-in-lieu of foreclosure, transfers of cooperative housing stock shares and trust indentures. The taxable amount is based upon the consideration paid and/or received by the grantee in connection with the transfer. The tax rate is one-half of 1% of the selling price of the property. Generally, the purchase price is included in the consideration for purposes of calculating the tax, but there are many exceptions to this rule, and the tax may be based on other factors.
RPT applies to the sale of both residential and commercial real property in the state, and RPTT applies to the transfer of ownership of residential and co-op housing in NYC. There are numerous statutory exemptions to the transfer taxes, including those for first-time buyers and capped transfer tax rates. The capped rates are in place to ensure that the transfer tax does not discourage real estate development and investment in the state.
As noted above, one of the exemptions is for the sale or conveyance of a commercial property to a not-for-profit tax-exempt corporation that is operated for conservation, environmental or historic preservation purposes. In addition, the transfer tax is exempt if the property is transferred to a municipality for use in a public park or if the property is conveyed to a government entity for use as an airport runway.
Although there are a number of statutory exemptions to transfer taxes, it is important to understand the general application of these transfer taxes and to carefully consider the effect on any intended transaction.
In New York City and elsewhere, transfer taxes are a standard closing cost when you buy or sell real estate, significantly affecting the overall transaction. They can be a substantial amount and can make a big difference in your bottom line, especially when they are in addition to mortgage or other loan interest.
While New York state has a set of laws that govern its transfer tax, the city also has its own additional set of rules, including an expanded definition of “conveyance.” In addition, it has implemented an incremental base tax on conveyances of residential property over $2 million. This makes understanding the specific transfer tax implications crucial for any real estate transaction in the city.
A quick review of the rules will help you avoid making costly mistakes that could result in paying a hefty penalty when preparing or recording your conveyance documents. Being aware of the nuances of transfer taxes is vital to ensure compliance and avoid unexpected financial burdens.
Conveyances of property over $500 require the filing of a real estate transfer tax (“RPT”) return with the clerk of the county where the property is located. The RPT is based on the consideration for the transfer and includes the selling price of the property as well as the assumption or discharge of any debt. The tax is collected by the purchaser who files a form TP-584 with the county clerk after receiving a deed or similar document. Accurately calculating and remitting transfer taxes is an integral part of the conveyancing process.
If the grantor is a corporation, joint stock company, trust, estate, receiver, assignee, or other fiduciary, it must file a TP-584 for each transaction and be jointly liable for the tax with the grantee. If the grantor is an individual, the individual and the grantee must sign the TP-584 together. This shared responsibility ensures that transfer taxes are appropriately addressed in various types of real estate transactions.
RPT applies to a broad range of transactions, including any assignment or surrender of a leasehold interest in a one-to-four family house; an option; a mortgage foreclosure or deed-in-lieu of foreclosure; and a conveyance by liquidation or by a trustee in possession. In addition, it applies to the transfer of a controlling economic interest in a corporation that owns property (N.Y. Tax Law SS 1402), highlighting the complexity and reach of transfer taxes in New York.
If an entity that owns real property or an economic interest therein owns assets other than the real estate or the economic interests therein, you must make a good faith apportionment of the consideration based on the relative fair market value of those assets and the real estate or economic interests. The resulting apportioned consideration should be entered on line 3 of Schedule 1 of the RPT return. In addition, if the entity named in Part I of the TP-584 owns more than one parcel of property or economic interest in property, you must provide separate Schedules for each. This detailed approach to transfer taxes ensures a fair and accurate assessment of tax obligations for diverse property holdings.
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