Gifts and the Applicability of New York Transfer Taxes
By Tom Corrie, Principal, Tax & Business Services & Christian Burgos, Managing Principal, Tax & Business Services
New York State imposes a 0.4% transfer tax on conveyances of real estate and an additional 1% mansion tax on residential properties sold for $1 million or more, whereas the City imposes a 1% to 2.625% transfer tax depending on the type and sales price of the real property conveyed. The transfer taxes are typically payable by the seller, but if the seller is exempt, or if collecting the taxes from the seller becomes difficult, both the State and the City can impose the taxes on the buyer. Conversely, the New York State mansion tax is payable by the buyer, but if exempt the liability shifts to the seller.
At face value, the application of transfer taxes appears to be a simple exercise. When real estate is conveyed for consideration exceeding $500 in New York State or $25,000 in New York City, transfer tax is levied. However, both the State and City extend the imposition of their transfer taxes to transfers of controlling interests in entities holding real property. A controlling interest is defined as a 50% or greater interest in the ownership or voting rights of an entity. To further the reach of the transfer taxes, the tax regulations provide for an aggregation of real estate conveyances occurring within a three-year period. There is a presumption that such transfers should be linked together because the parties are deemed to be “acting in concert.” Accordingly, a series of separate transfers will be combined for the 50% or more controlling interest transfer test when it appears that a plan to ultimately sell the interest was pre-existing. This presumption may be rebutted if the parties can establish that each transfer was in fact isolated.
One question that I routinely receive with respect to transfer tax applicability is whether New York State and City apply the taxes to gifts. I often field calls from clients who are contemplating gifting, or have already gifted, real property to a child, relative or significant other and are concerned of potential transfer tax exposure. In one recent matter, a parent gifted her daughter a 60% interest in a limited liability company (LLC) that held as its only asset a $1.4 million New York City condominium. A year later, the mother and daughter had a falling out leading the mother to subsequently sue for the return of the entity interest. The parties ultimately settled the suit whereby the daughter agreed to purchase the remaining 40% of the LLC interest. Of course, in these types of situations the answer as to transfer tax applicability is – it depends. The facts and circumstance of each gift conveyance influences the determination of the taxability or exemption of the transfer.
Under New York Tax Law Sec. 1402(a), the RETT is imposed on each conveyance or interest therein of real property when consideration is greater than $500. By its very nature, a true gift does not include the exchange of consideration and therefore is exempt from the RETT. However, if a gift includes the transfer of a mortgage liability on the property, the relief of indebtedness is regarded as consideration thereby prompting transfer tax liability to arise. Similar rules for bona fide gifts and mortgage relief also apply for New York City RPTT purposes.
In our due diligence with gift donors and recipients, we examine each factor of the conveyance to resolve transfer tax applicability. Was there a conveyance of real property or an interest in an entity holding real property? If conveying an interest in an entity, does the transfer constitute the transfer of a controlling interest? Did the parties engage in, or plan to engage in, other conveyances with respect to an interest in this particular property? How much consideration, if any, was paid for the real property? Does the donor receive any mortgage relief by way of the transfer?
Based on my conversations with the gift recipient in the example above, we ascertained that the condo owned by the LLC was not subject to a mortgage and that no other consideration was transferred in exchange for the entity interest. Accordingly, the 60% transfer was exempt from both the RETT and RPTT. Furthermore, the subsequent purchase of the remaining 40% interest in the LLC was also exempt from transfer tax because it was (1) less than a controlling interest (i.e., less than 50%) in the entity, and (2) not part of a contemplated series of transfers necessitating aggregation. It should be noted, however, that both New York State and New York City require the filing of transfer tax returns whereby the filer specifically identifies the conveyance as occurring under the gift exemption.
With real estate prices continuing to rise to record levels in New York, the RETT and the RPTT have significant financial impact. Currently, the average sales price of a Manhattan residential property is nearly $1.8 million translating to over $50,000 of transfer taxes. If you have any questions regarding the applicability of the RETT and RPTT to your transfers of interests in real property, please contact your Marcum LLP representative.