Whether a property qualifies as “residential real estate” can have significant tax implications for New York State and City transfers. First, the New York City real estate transfer tax is imposed at the rate of 1.425% on transfers of “single family, two family, and detached residential condominiums” (or 1% if the consideration is $500,000 or less) and at the rate of 2.625% for most other types of property (or 1.425% if the consideration is $500,000 or less).
Second, New York State imposes an additional real estate transfer tax on the transfer of a “single, two or three-family home, individual condominium unit, or cooperative apartment” when the consideration is of $1 million or more (colloquially referred to as the “tourist tax”). The tax is generally imposed at the rate of 1%, although higher progressive rates apply to properties located in New York. Thus, the sale of a single residential condominium unit would result in a higher New York State transfer tax, but a lower New York City transfer tax compared to the sale of a commercial property of comparable value.
Although New York State and New York City laws use nearly identical language, the two jurisdictions take conflicting positions when it comes to bulk sales of residential condominium units. New York State considers a sale of multiple residential condominium units by a single grantor to a single beneficiary to be subject to mansion tax (although each condominium unit is considered separately to determine the applicable rate and whether the $1 million threshold has been exceeded).
However, the City of New York does not consider such a sale to be a transfer of an “individual condominium unit” and is therefore subject to tax at the highest tax rates. The combination of these conflicting interpretations leaves a bulk sale of condominium units with the worst of both worlds, subjecting such a sale to the highest combined transfer tax rate of any property type in New York.
In a private ruling recently issued by the New York City Department of Finance, a taxpayer was able to take advantage of New York City’s reduced transfer tax rates on the sale of multiple condominium units. In the decision (FLR No. 22-5022), the taxpayer owned a condominium unit in a building in Manhattan.
The taxpayer also owned two “studios” in the same building. Condominium regulations provided that only the owner of an ordinary condominium unit could own a studio, and that a studio could only be occupied by employees, family members, or non-paying guests of the owner who only stayed no more than three months. If the owner of a studio apartment rented his ordinary condominium unit, he was generally required to also rent his studio apartments to the same tenant for the same term or to rent the studio apartments to another condominium owner.
Based on these facts, the New York City Department of Finance ruled that the sale of the taxpayer’s condominium unit with his two studio apartments constituted the sale of a single condominium residential unit and was therefore subject at lower transfer tax rates. The decision held that the studios were an integral part of the taxpayer’s ordinary condominium accommodation, because the use of the studios was significantly restricted and linked to the occupation of the ordinary condominium accommodation. The court cited as precedent an earlier New York City Tax Appeals Tribunal case that reached the same result on similar facts.
The outcome of the decision makes sense and appears correct given the particular facts and circumstances of this case. However, the ruling does nothing to negate New York City’s position that a sale of two or more condominium units is normally subject to the higher tax rates. The combination of New York City’s position that such a sale is taxable at the highest rates and New York State’s position that such a sale is subject to mansion tax is clearly unfair. , because the two positions interpret similar language inconsistently. However, in the absence of litigation, it seems unlikely that either jurisdiction will change its position.
Ezra Dyckman is a partner at Roberts & Holland. Charles S. Nelson is associated with the firm.