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SALT TALK: Traps inTransactions, Part II:  Don’t Let theTransfer Tax Creep Up on You

Posted by Wayne Berkowitz CPA, J.D., LL.M. on Oct 12, 2015 7:00:00 AM
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The market is booming. You received an offer you couldn't refuse and cashed in on the 10% interest you have been holding in that New York City real estate partnership. You don't know the buyer, but your attorney confirmed you have no restrictions on who you can sell to and the price is right. The deal is closed. You receive a $5 million check in exchange for your 10% interest and increase your federal and state estimated tax payments accordingly. 

Two and one half years later, New York City's Department of Finance sends you a certified letter citing this transaction and requesting you remit the transfer tax immediately. The combined City and State rates would come to 3.025% of the selling price of the "real property" or $162,500. Adding in interest and penalties to date, the total is well north of $250,000.

You call your attorney and assert, "I didn't sell a controlling interest in real property and should not be subject to the State and City Transfer Tax." What your attorney forgot to tell you — and did not plan for — were the dreaded aggregation rules. In simple terms, any transaction that takes place within a three-year period is presumed to be part of a plan and aggregated with other transactions. It's then determined whether a controlling interest in real property has been transferred, which triggers the transfer tax. You received the letter because someone else (perhaps the buyer) just bought 40% of the same real estate partnership from another shareholder.

What could you have done to avoid this? As far as the State and City are concerned, not much. They will seek to collect from whomever they get the tax from first; both the transferor and transferee are primarily liable.  You can put a provision in the sales agreement that the buyer is responsible for paying the tax, regardless of who triggers it at a later date. The taxing authorities can still look to you, but at least you will have an avenue of recourse. 

No one likes surprises. Make sure your attorney and your CPA are consulted on complex real estate transactions. Questions regarding the tax implications? Please contact us.

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.

Topics: SALT TALK

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