Practical implications of changing the transfer tax

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Question: I am a lawyer for a sponsor on a project in Manhattan. I read that the tax law on the increase in transfer taxes had been amended this summer. Can you explain the change in the law as well as the disclosure requirements related to my client’s offering plan?

Responnse: For readers unfamiliar with this area of ​​practice, let me begin with what “grossing up” means for land transfer tax purposes and why it is done. So it’s no surprise that the sale of condominium or co-op shares in New York City is a taxable event. Among the multitude of fees and charges paid at the closing table, one of the parties must pay New York State Real Estate Transfer Tax (collected in accordance with Tax Law §1402), Transfer Tax from New York City real estate property (taxed under NYC Administration Code §11-2102) and, on a purchase or sale for consideration of $ 1 million or more, the so-called “tax on residences ”(taxed in accordance with tax law §1402-a, the tax rate increasing on a progressive scale in accordance with tax law §1402-b).

The §1404 (a) tax law enacts that the grantor (sponsor) must pay the New York State real property transfer tax set out in §1402, while separate sections of the tax law impose the so-called “Residence tax” to the beneficiary (buyer). But as any lawyer who has represented the purchaser of a co-ownership unit or co-op shares from a sponsor knows, the contract for a sponsor unit or actions will invariably require that the beneficiary (purchaser) pay all fees. transfer, and this is where the concept of calculating gross income comes into play.

Where a beneficiary agrees to pay New York State real estate transfer tax instead of the grantor (which paragraph 1404 (a) imposes on a grantor), the amount of the transfer tax itself is considered as additional consideration paid for the condominium unit or cooperative shares. . Thus, when calculating the total consideration paid by the beneficiary, the purchase price would be increased by the amount of New York State real estate transfer tax that the beneficiary paid in place of the grantor. This sum, which we can call the “total plus consideration” paid by the beneficiary, is the amount on which all transfer taxes would be calculated. We would not increase a “residence tax” because, legally, a “residence tax” is imposed on the beneficiary. Increasing the total consideration had been a widespread practice designed to protect beneficiaries against claims for underpayment of tax, but this was not explicitly required by the text of the tax law.

In the state budget, adopted in April, there was an amendment to the tax law §1404, and the law says nothing more about the increases. §1404 (a), in force from July 1, 2021, now reads, in the relevant part:

The property transfer tax instituted in application of article fourteen hundred and two of this article shall be paid by the Licensor and such tax is not payable, directly or indirectly, by the Concessionaire, except as provided in a contract between the Licensor and the Concessionaire or as otherwise provided in this Article. * * * In the case of a transfer of a residential building as defined in subsection (a) of article fourteen hundred and two-a of this article, if the tax imposed by this article is paid by the concessionaire under a contract between the grantor and the beneficiary, the amount of this tax is excluded from the calculation of the consideration subject to tax under this article.

(Emphasis provided).

In other words, if the beneficiary has agreed in their contract to pay New York State Real Property Transfer Tax for which they would otherwise be liable under Section 1404 (a), then when calculating of the total consideration the recipient paid for the unit, the amount of New York Real Estate Transfer Tax paid is no longer included. This is the elimination of the mark-up, and this is good news for buyers who almost always agree to pay the full transfer tax when acquiring a condominium or co-op shares. a promoter. In particular, the law leaves the parties free to negotiate these conditions in a sales contract.

It is also important to note that nothing in revised §1404 (a) changes the increase in the New York City real estate transfer tax and, therefore, the increase in a beneficiary’s total consideration to purposes of calculating the amount of New York City real estate. The transfer tax due is expected to continue.

So, about your client’s offer plan …

There are also other considerations. Sponsors’ attorneys have received deficiency comments from the Law Department regarding changes to the tax law in 2021, and from those comments it appears that the Law Department is keen to ensure that the revised law is followed to. the letter, which means that it is insufficient to simply file an addendum to the offer plan which indicates which of the parties is responsible for the payment of transfer duties or how they are calculated and distributed. The §1404 (a) tax law requires that these matters be set out in the contract, not the offer plan, and therefore the purchase contract may also need to be amended. In practice, sponsor lawyers will have to update their standard contract rider to include the transfer of the obligation to pay transfer duties when it is a negotiated contract.

In comments on the gaps, the Law Department also guided the sponsors to remove the magnification language from the terms of the offer plan: “[if the Plan includes disclosure regarding the calculation of [New York State Real Estate Transfer Tax] payable by a purchaser on the basis of “grossed up” consideration, remove from the scheme all references to such increased consideration payable by a purchaser. If you receive this comment, you may need to edit and rephrase the section of your offering plan that describes typical closing costs for a buyer.

Whether this change in law is important to your client’s buyers is factual. Out of prudence, the disclosure of the statutory revision will make the most sense. To that end, below is an unofficial example of a disclosure of the New York State tax law amendment that has been found acceptable by the Law Department (which is of course subject to change if the Office issues more formal guidelines):

The New York State Legislature passed the 2021-2022 New York State Budget, which amended Section 1404 (a) of the New York State Tax Law (the “Modification of the tax law“). The tax law change eliminates the requirement to “mark up” the consideration of a unit when a buyer enters into a contact agreeing to pay New York State real estate transfer tax (“RETT») At the end of the title of the unit. In accordance with the change in tax law, a buyer who, after April 1, 2021, executes a contract that requires the buyer to pay the RETT at the closing of the title of the unit, or a buyer who closes the title of a unit after July 1, 2021, will no longer pay the part of the RETT based on the increased consideration. The RETT is 0.4% for residential transfers with consideration of less than $ 3,000,000.00 and 0.65% for residential transfers with consideration of $ 3,000,000.00 or more. Accordingly, the Plan is hereby amended to remove all references to such increased consideration paid by a purchaser in respect of the RETT.

Finally, keep in mind that this is good news for everyone involved. What buyer wouldn’t want to know that they will pay less transfer tax than originally planned?

Erica F. Buckley is the former Office Manager of the Real Estate Finance Bureau and is the Practice Group Leader of the Nixon Peabody Co-op and Condominium team. This column is for informational purposes only and does not replace agency advice.

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