Leaseholds and the Applicability of New York State Real Estate Transfer Taxes
New York’s transfer taxes contain many nuances that impact their applicability, tax base and computations. Here, we examine how the imposition of New York State Real Estate Transfer Tax (RETT) and New York City Real Property Transfer Tax (RPTT) can be substantially lower when it comes to leaseholds. Read on to learn how the RETT and RPTT may affect leaseholds to better understand the tax implications and avoid any unwanted surprises.
NEW YORK STATE
In general, New York State Real Estate Transfer Tax (RETT) is imposed on all real property conveyances at a rate of 0.4%. The RETT applies to real estate leases if the following criteria are met:
- The leasehold, including renewal options, is for more than 49 years;
- The lessee made or may make substantial capital improvements; and
- The lease includes “substantially all of the premises” constituting the real property — which, according to tax regulations, represents 90% or more of the total rentable space of the premises, exclusive of common areas.
In calculating the RETT on the consideration paid for a leasehold, New York applies a present value computation on the rental income stream that includes not only the rental payments for the base term but also any renewal terms. The state assumes that a lessee will exercise all available renewal options. To calculate the future rental income’s present value a discount rate of 110% of the federal long-term rate, compounded semiannually in effect 30 days before the date of transfer is used.
For example, assume in September 2017, a landlord enters into a 75-year lease with a tenant for an entire vacant lot located in New York State and the lease allows the tenant to construct an office building on the property.
- The rental price is $100,000 per year for the term of the lease and the applicable federal interest rate for the month is 2.58%;
- Taken at 110%, the discount rate of the lease payments is 2.84%;
- Since the lease provisions qualify as a taxable conveyance, the present value of consideration is discounted to $918,134; and
- Accordingly, the RETT liability is $3,673.
NEW YORK CITY
New York City Real Property Transfer Tax (RPTT) is imposed on transfers of real property or interests in real property when consideration exceeds $25,000. The RPTT is assessed at a graduated rate ranging from 1% to 2.625%, depending on the conveyed property’s classification and the total consideration paid.
The RPTT usually has a larger financial impact than the RETT due to the higher rates of the RPTT. For example, for conveyances of commercial real property within New York City the RPTT rate (2.625%) is more than six and half times that of the RETT.
However, with respect to leases the RPTT is much less burdensome. Unlike the state’s criteria of subjecting leases to the transfer tax, all New York City real property leaseholds in excess of $25,000 are subject to the RPTT, regardless of the terms. Nevertheless, the RPTT specifically excludes from taxable consideration any payments that constitute rent for purposes of the Commercial Rent Tax (CRT).
New York City imposes this unique tax on a lessee for the use or occupancy of a premise that is used in a trade or business. The tax is levied on tenants who occupy a property located in Manhattan south of center line running down 96th Street. Under the CRT regulations, rent is defined very expansively and can include various charges pursuant to the lease terms. Accordingly, this CRT exclusion can provide for a substantial reduction, or often a total elimination, of the RPTT imposed on a lease.
Although tenants located in Manhattan on the north side of the center line of 96th Street and those in the city’s other boroughs are not subject to the CRT, it is important to note that they too may claim this RPTT exemption. The city’s tax code does not require a lessee to be subject to the CRT in order to be able to claim the exemption. Rather, the code references that any payment that would be defined as rent under the CRT rules qualifies for the RPTT exemption, regardless of whether one is actually subject to the CRT.
If you have questions regarding New York State Real Estate Transfer Tax or New York City Real Property Transfer Tax, please contact your Marcum representative.