Housed in the New York State Fiscal Year 2018 Executive Budget is proposed legislation that would significantly impact real estate transactions in the State by expanding the scope of the real estate transfer tax.
Currently, real estate transfers in New York State are subject to a 0.4% tax on the consideration paid for an interest in real property (the “Tax”). The Tax applies to deed transfers as well as transfers of controlling interests in entities that own real property. Generally, a 50% or more shift in ownership in an entity that owns an interest in property located in the State constitutes the transfer of a controlling interest. There is also an aggregation concept that consolidates multiple transfers that are “part of a plan” to determine whether a 50% or more shift has occurred.
Assuming no aggregation of prior or subsequent transfers, the current law permits the transfer of a 49.9% (anything below the 50% threshold) in an entity owning a New York real property interest without the imposition of the Tax. For certain entities owning New York State real property constituting 50% or more of their assets, the proposed legislation effectively eliminates the current 50% controlling interest threshold and imposes the Tax on minority interest transfers that historically have been exempt from the Tax. Applicable entities include partnerships, LLCs, S Corporations or non-publicly traded C Corporations with fewer than 100 shareholders.
“Consideration” for these minority interest conveyances would be calculated by multiplying the fair market value of the real property by the percentage of the minority interest transferred. In addition, the bill also contains an “anti-stuffing” provision that requires any non-New York State real property assets to be held for at least 2 year to be counted toward the “real estate entity” determination.
The Memorandum in Support of the Budget states that the purpose of the amendment is to put interest transfers in real estate entities on par with tenancy-in-common interest transfers. Currently, the proposal does not impact the much more onerous, New York City Real Property Transfer Tax, which is imposed at a rate as high as 2.625% of the consideration paid.
I will keep readers updated as to any developments in this area. In the meantime, if you have any questions, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.