Transfer Taxes: "Traps" for the Unwary Seller

New York State (NYS) and New York City (NYC) real estate transfer taxes can be a “trap” for the unwary seller of real estate. These taxes are due and payable on a transfer of real property located in New York State and/or New York City even if the property is sold at a loss.

In this sluggish economy where residential and commercial real estate sales are down and the selling prices are less than expected, the NYS and NYC real estate transfer taxes are imposed on conveyances of real property located in New York, even if such properties are sold at a loss. The reason is that the realty transfer tax is imposed on the “consideration” received for the property and not on the “gain” realized, if any.

For NYS real estate transfer tax purposes, any transfer of an interest in real property in excess of $500 is subject to a tax of 0.4% of consideration received and the tax is payable by the seller. A conveyance includes the sale, exchange, assignment, surrender, option or transfer of a “controlling interest” in any entity that owns New York real estate. A 50% or more ownership in such entity is a “controlling interest”.

For real estate transfers with consideration being $500,000 or more, the value of the consideration must also include the value of any lien or mortgage remaining on the property at the time of the sale.

For residential real property sold or conveyed for $1 million or more, there is an additional real estate transfer tax of 1% of the consideration paid. The buyer is subject to this additional tax, also known as the “mansion tax.”

For NYC real property transfer tax purposes, similar rules apply for conveyances where the consideration is in excess of $25,000. NYC has two rates, one for commercial realty transfers and one for residential realty transfers. For residential realty conveyances in excess of $500,000 the rate is 1.425%. For commercial realty conveyances in excess of $500,000, the rate is 2.625%.

Tax Enforcement on the Rise: Personal Income Tax Residency Audits

New York State and New York City (collectively New York) taxing authorities have been focusing on auditing high-net-worth individuals who own or rent a second residence in New York and are seeking to tax them on their worldwide income.

One significant way that the New York Taxing Authorities have “beefed up” their tax enforcement over the last several years, is through increased scrutiny of high-net-worth individuals that have their primary residence outside of New York and a secondary residence or vacation home located in New York. The reason? If the taxing authorities can determine that such an individual is a “statutory resident” of New York, New York can tax such individual on his or her worldwide income. This becomes a problem since the state of primary residence or domicile (e.g., New Jersey or Connecticut) already has the authority and is taxing such individual on his or her worldwide income as well.

Although the taxpayer is entitled to a tax credit for double taxation of certain income on their personal income tax return filed in his or her domicile state, other passive income (such as interest, dividends or royalties) may ultimately be subject to double state income taxation.

For New York to deem an individual a “statutory resident,” a two part test must be met. First, the individual must own or rent a “permanent place of abode” located in New York. Second, the individual must be “physically present” within New York in any given year for more than 183 days.

There is a plethora of court decisions recently issued that address what constitutes a “permanent place of abode” and in most cases, the taxpayers have not prevailed. Generally, any house, apartment, co-op or condo that has year-round living facilities including hot water, kitchen and a sleeping area qualifies as a permanent place of abode. Only if the abode is a mere camp or cottage, which is suitable and used only for vacations. will it not be considered a permanent place of abode.

It is imperative that an individual taxpayer who owns or rents a second residence in New York keeps detailed diaries and records to be able to prove by “clear and convincing” evidence that they were not physically present in New York for more than 183 days. There are a significant number of court decisions recently issued in New York that determine whether a taxpayer has met his or her burden of proof that he or she was absent from New York for more than 183 days during the year. If a taxpayer can meet their burden of proof for the days not present in New York, the State can only tax such individual as a non-resident and they are subject to tax only on their New York source income.

Recent Tri-state Tax Law Changes

New York

In December 2011, Governor Cuomo signed into law, significant changes to the personal income tax structure which are effective January 1, 2012. The former “millionaire’s tax,” which taxed couples earning over $400,000 per year at a 6.89% tax rate and couples earning $40,000 or more per year at a rate of 6.85%, ended as of December 31, 2011.

Under the new law, the marginal tax rates for married couples filing jointly range from 6.45% (income of $40,000 to $150,000) to 8.82% (income of over $2 million).

Other changes include a reduction of the MTA payroll tax, which is eliminated completely for employers with payroll below $1.25 million annually. The exemption for self-employment income subject to the MTA payroll tax increases to $50,000.

The State has created an inner city youth employment credit for select industry employers. Lastly, there is now a job retention credit for businesses harmed by Hurricane Irene and Tropical Storm Lee for businesses with at least 100 employees that have retained jobs or whose roles have been expanded in select industries. The credit is equal to 6.85% of the wages of retained jobs.

Earlier in 2011, the State passed the Marriage Equality Act, which was signed into law on June 24, 2011. The Act provides for equal tax treatment of all married couples, including same-sex couples.

New Jersey

The 2011 tax law changes affected the minimum corporate business tax on S corporations, decreasing the tax imposed on various levels of New Jersey gross receipts. The minimum tax now varies from $375 (for New Jersey gross receipts less than $100,000) to $1,500 (for New Jersey gross receipts of $1 million or more).

Certain property taxes have changed affecting senior citizens, blind or disabled taxpayers who own their principal residence in New Jersey.

Lastly, beginning on January 1, 2012, the research expense credit cap or limitation has been eliminated.

Connecticut

For corporate and personal income tax purposes, the State has redefined the standard under which it can impose such taxes and has adopted an “economic nexus” (i.e., taxable presence) standard. To be subject to tax, the taxpayer must have “substantial presence” in the State and derive income from sources within the State.

For sales/use tax purposes, the State has adopted the “click-through nexus” (i.e., taxable presence) standard under which it can require out-of-state remote retailers to register as a vendor and begin collecting Connecticut sales tax on sales made to in-State customers.

The out-of-state retailer will meet this standard provided (1) it has an agreement with an in-State person or an affiliate allowing access to the out-of-State retailer’s website, (2) a commission is payable to the in-State person or affiliate based on sales made in-State and (3) the out-of-state retailer has annual taxable in-State sales of more than $2,000.

IRS Circular 230 Disclosure

Treasury Regulations require us to inform you that any Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

© Marks Paneth LLP 2012 MANHATTAN|LONG ISLAND|WESTCHESTER|CAYMAN ISLANDS


About Steven P. Bryde

Steven P. Bryde Linkedin Icon

Steven P. Bryde, JD, is a Senior Consultant in the Tax Practice at Marks Paneth LLP. He specializes in state and local taxation for corporations and flow-thru entities in a cross section of industries as well as for individuals. With more than 30 years of tax experience, Mr. Bryde has spent nearly his entire career in public accounting. Over the years, he has held positions at both global and regional accounting firms. Among his accomplishments... READ MORE +


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