Not just income tax
About two weeks ago, Governor Cuomo and New York State legislature agreed on a budget for the state's fiscal year 2021-2022. While most businesses and their owners understandably have turned their attention to the increased personal and corporate income taxes (i) enacted under budget legislation, there are several other provisions that they should not lose sight of. (Ii)
These include changes to the state transfer tax ("RETT"). (Iii) “Real estate transfer tax?” You may ask. Isn't the tax a relatively small cost (iv) associated with selling real estate in the state?
Yes and no. (V) Yes, the tax is incurred on the sale or other “taxable promotion” of New York real estate, and yes, the tax rate is relatively low. No, the tax is not limited to the sale of real estate.
Regardless of how businesses and investors view RETT, the governor and state lawmakers consider it important enough to include a provision in budget legislation for 2021-2022 to ensure the proper assessment, remittance and collection of the tax.
Before discussing these recent changes to the RETT and better assessing their impact, it may be useful to do a quick review of the Statute.
The RETT
Generally, any taxable transfer of New York property or interest in such property will be taxed at 0.40 percent of the consideration paid for the transfer. (Vi)
However, for New York City taxable real estate transfers that occur on or after July 1, 2019, a RETT rate of 0.65 percent (i) applies to commercial real estate transfers with a sales price of $ 2 million or more (ii) for a residential property promotion with a sale price of at least $ 3 million.
What is a taxable promotion?
All real estate transports are considered taxable for the purposes of the RETT. (Vii)
Carriage includes the sale or exchange of real estate (viii) and the sale or exchange of "interests" in real estate. An ownership interest in real estate includes a fee title, a lease interest, and the transfer of a controlling interest in a company that has an interest in real estate. (Ix)
Therefore, common situations in which the RETT needs to be considered include bringing real estate into a business entity in exchange for equity therein; the distribution of real estate to the owners of a company, be it in liquidation of the company or the equity of a particular owner contained therein; the merger of two business units, one of which has a stake in real estate. (x)
The creation of a lease is a taxable transfer where (a) the sum of (i) the original lease term plus (ii) any extension terms exceeds 49 years, (b) significant capital improvements are made or may be made for the tenant's benefit and (c) the lease applies to substantially all (xi) premises.
The creation of a lease that involves being granted an option to purchase the leased property (regardless of the lease term) is also a taxable transfer. (Xii)
The transfer of existing rent (regardless of the remaining lease term) or the granting of an option to purchase real estate are taxable transfers for which consideration is the amount paid by the buyer. (Xiii) When the lessor pays An amount that the lessee receives to return a lease. The consideration is the amount paid. However, no tax is levied if the renter pays the landlord to get out of a lease.
Control of interests
In a real estate company, the transfer or acquisition of a "majority stake" occurs when an individual or group of individuals "acts, transfers, or acquires" together: in the case of a corporation, either 50% or more of the total combined Voting rights of all share classes or 50% or more of the capital, profits or economic interests in these voting shares; and in the case of a partnership, 50% or more of the capital, profits or economic interests in such partnership. (xiv)
The value of the company's interest in real estate relative to the value of the company's other assets is irrelevant. (Xv)
In general, if there is a transfer or acquisition of an interest in a company that has an interest in real estate, and within three years there is a transfer or acquisition of an additional interest or interests in the same company, the transfer or acquisitions are added together to determine whether a transfer or acquisition of a majority stake has taken place. (xvi)
What is consideration?
In general, "consideration" means the price actually paid or payable for the property or the interest contained therein, whether paid or payable in money, property or any other valuable item, including the buyer's stock. If the consideration includes real estate other than money, the consideration is deemed to be the fair value (xvii) of the property or the interest contained therein.
This includes the repayment or repayment of a debt or obligation, as well as the amount of a mortgage or encumbrance on the property, regardless of whether the underlying debt is accepted or assumed subject to (xviii).
Exclusion does not occur due to deferred payment of the purchase price, regardless of whether this is represented by bonds or in any other way. There is no rate reporting for the RETT. (xix)
When transferring a majority stake in a property-owning company, “consideration” means the fair value (gross, not net) of the property divided by the percentage of ownership transferred. (Xx)
When creating a lease that is a taxable transfer, the consideration for the calculation of the tax is the present value of the right to receive rental payments or other payments resulting from the use and occupancy of the property, including the attributable rent on any renewal terms . (xxi)
Attention
The scholarship holder and the scholarship holder must file a joint transfer tax return for each promotion. (Xxii) If the carriage is to be recorded (e.g. a document), the declaration must be submitted to the competent registry of the county. A due tax can also be transferred there. (xxiii)
If the transfer is not recorded (e.g. a sale of shares – a controlling interest), the return must be filed with the state and the tax paid to the state.
In both cases, both the seller and the buyer must sign the return (xxiv) which – together with the tax – is due no later than the 15th day after delivery of the instrument that causes the grantor to transmit to the beneficiary (xxv)
The budget for 2021-2022(xxvi)
The real estate transfer tax is usually to be paid by the grantor; in other words, the person making the property transfer (or interest in it). (xxvii)
If the grantor does not pay the tax in a timely manner, the person who acquired the property as part of the transport (the “Grantee”) will have to pay the tax. In this case, the tax becomes the joint and several liability of the Beneficiary and the Beneficiary (xxviii), although budgetary legislation provides the Beneficiary with a cause of action against the Beneficiary for reimbursement of taxes, interest and penalties paid by the Beneficiary in these circumstances. (xxix)
In order to ensure payment and facilitation of the collection of the RETT due to a particular promotion, the budgetary legislation extends beyond the grantor and the grantee also the persons who can be held liable for the RETT by adding "account of the responsible person", i.e. H. personal liability – according to the RETT law. (xxx)
In particular, the Budget redefines the term “Grantor” (xxxi) to include not only the Grantor entity that brokered the property or the Intertest contained therein, but any individual, corporation, partnership or limited company officers or employees of any company (including a dissolved company) or a member or employee of a partnership or a member, manager or employee of any limited liability company who was obliged as such to be an officer, employee, manager or member for such Company, partnership, limited liability company or sole proprietorship in meeting the requirements of the RETT. (Xxxii)
The above change comes into effect on July 1, 2021 and applies to promotions that take place on or after this date. (Xxxiii)
However, before the state can demand payment of the tax from one of the newly appointed "grantors", it must first determine whether that person was "obliged to act" on behalf of the actual grantor in order to meet the requirements of the RETT.
To act under a duty
The tax can only be collected from persons who were required to act on behalf of the grantor in relation to the taxable transport concerned. However, the amended RETT Act does not define the term “duty to act”.
Notwithstanding this omission, the interpretation of the term in the context of other taxes (e.g. sales tax) should provide some helpful guidance.
The determination of whether a person is a person who is obliged to act for a grantor company is therefore based on an in-depth examination of the respective facts. The main investigation should be whether the person concerned has sufficient authority and control over the affairs of the grantor. The mere activity as a manager or employee of the grantor should not in and of itself justify the imposition of personal liability for the RETT.
In general, a person empowered to sign a grantor's tax returns, or responsible for keeping or managing the grantor's books, is likely to be required to act. (Xxxiv)
Among other things, it must be taken into account whether the person was authorized to write checks on behalf of the approver or had knowledge of and control over the financial affairs of the approver.
If the individual is determined to have sufficient authority and control over the grantor's affairs to be considered a responsible person for the purposes of the RETT, whether as an officer, employee or owner, he or she is subject to the authority of the state Collect all the criminal RETT.
What's next?
The brief review of the RETT presented above should highlight the possible application of the tax to many common business scenarios involving the direct or indirect transfer of an interest in real estate, be it through sale, exchange, capital injection, current or liquidating distribution, merger, sale of stocks or shares in the company, creation or assignment of a lease or otherwise.
In some of these situations, a party may be tempted to “avoid” the RETT or inappropriately reduce the amount of tax owed. (Xxxv) For example, how often has a taxpayer indicated that he may not report the sale of a controlling interest because there is no requirement or need to record a deed? Even after telling them that New York S's corporate and partnership tax return requires information about the company's ownership of real estate in New York in the past three years, and whether there has been a transfer or acquisition of a controlling interest, for example of society or partnership in these years? (xxxvi)
The introduction of the concept of “responsible person” in the enforcement of the RETT should result in people who are likely to be “acting on behalf of a company” treating the tax with more respect – the risk of personal liability for a tax incurred by a Company imposed and should be borne by the company should have a positive impact on the reporting of taxable promotions, the detailed description of those promotions (including the fair value of the property shares and the consideration paid) and the payment of the resulting tax.
We will see.
For the same reason, truly “passive” investors should think twice about asking for a “seat at the table” or an official-sounding title. They should also check that their shareholder or partnership / company agreements provide them with adequate protection against potential claims by the state in relation to the RETT. (Xxxvii)
(i) The corporate income tax rate has been temporarily increased from 6.5% to 7.25% for taxpayers with a business income base greater than $ 5 million. The increase applies to tax years beginning on or after January 1, 2021. it goes under (I hope) for tax years beginning on or after January 1, 2024.
(ii) Several amendments have also been proposed that have not entered into force, including a proposed increase in the maximum estate tax rate from 16% to 20%. It is up to all of us to pursue these proposals. Mr Cuomo will not be there forever, and his successor may be more amenable – whether politically or philosophically – to help pass this and other tax laws.
(iii) Article 31 of the New York Tax Act.
(iv) In contrast, the New York land transfer tax is anything but a "minor" expense. For example, the city's tax rate on commercial property transfers valued at more than $ 500,000 is 2.625%.
(v) If you expect something approaching tax metaphysics, I am sorry to disappoint you.
(vi) NY Tax Law Sec. 1402. The tax rate can be expressed as $ 4 tax for every $ 1,000 consideration.
In NYC, the rate is 2.625% of the consideration if the consideration is more than $ 500,000. Otherwise the rate is 1.425%.
(vii) The law exempts promotions made by certain "donors" from tax. for example the government. (Non-profit organizations are not exempt from the RETT; however, the city provides an exemption for organizations from their real estate transfer tax under Section 501 (c) (3).) The law also provides exemptions for certain transfers. For example, a transfer that does not change the beneficial ownership of the property (a "mere change" in form).
(viii) Including a similar exchange of real estate made in accordance with IRC Sec. 1031.
(ix) Thus, a transfer of shares or a participation in a company can trigger the tax.
(x) 20 NYCRR 575.11. https://govt.westlaw.com/nycrr/Document/I50f3589ccd1711dda432a117e6e0f345?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default).
(xi) 90% or more of the total rentable area, excluding common areas.
(xii) This often occurs when the seller of a company retains ownership of the property from which the company operates.
The consideration in this case is the present value of the rental payments plus the amount paid for the option.
(xiii) 20 NYCRR 575.7 (c). The consideration does not include the present value of the remaining rental payments to be made.
Are you inquiring about the value of a lease that reflects market conditions? There is probably no bargain item to assign a value to. If an ongoing business is sold, see the Asset Acquisition Statement on IRS Form 8894 – How Much of the Purchase Price Is Allocated to the Lease?
(xiv) NY Tax Law Sec. 1401 (b). People act together when they have a relationship in which one person influences or controls the actions of another person. If they are not generally controlled or owned, persons are treated as acting in concert if the entity with which the seller or buyer has negotiated and is making the transfer of ownership indicates that they are acting as one entity. 20 NYCRR 575.6.
(xv) This should be in contrast to FIRPTA (IRC Sec. 897), according to which a transfer of company shares is subject to FIRPTA tax and is only withheld if the company is a "US American Real Property Holding Corporation" – in general if the company's US real estate exceeds 50% of the total market value of the company's assets.
(xvi) 20 NYCRR 575.6 (d).
(xvii) “Fair Market Value” means the amount a willing buyer would pay a willing seller for real estate. It is usually determined through a valuation based on the value of the property at the time of submission. It is not a “net market value,” which is the fair value minus the amount of the mortgage on the property. 20 NYCRR 575.1 (l).
(xviii) NY Tax Law Sec. 1401 (d).
(xix) In contrast, the deferred receipt of the purchase price enables the seller to defer the recognition of the profit attributable to the deferred amount, depending on the property sold. IRC Sec. 453. Of course, postponement also carries a credit risk.
(xx) 20 NYCRR 575.1 (d) (4).
(xxi) The present value is determined using 110% of the Federal Mid-Term Rate (“AFR”; see IRC Section 1274) and this discount rate is applied to “net rents” (taking operating costs into account). NY Tax Law Sec. 1401 (d); 20 NYCRR 575.1 (d) (2), 575.7 (b) (2).
(xxii) NY Tax Law Sec. 1409; 20 NYCRR 575.14.
Returns must be kept for at least three years.
(xxiii) Form TP-584 is used for moving real estate out of town. TP-584-NYC is used for transportation around the city.
(xxiv) NY Tax Law Sec. 1409; 20 NYCRR 575.14 (e).
(xxv) NY Tax Law Sec. 1410; 20 NYCRR 575.14 (b) and (c).
(xxvi) P.2509-C, A.3009-C.
(xxvii) NY Tax Law Sec. 1401 (g), sec. 1404
If the transfer consists of a transfer or acquisition of a majority interest in a company with a share in real estate, “Grantor” means the company with a stake in real estate or a shareholder or partner who transfers shares or partnership shares.
(xxviii) For example the seller or the buyer. NY Tax Law Sec. 1404 (a); 20 NYCRR 575.4.
(xxix) Part O, Section 2.
(xxx) FY 2022 New York State Executive Budget Memorandum in Support. https://www.budget.ny.gov/pubs/archive/fy22/ex/artvii/revenue-memo.pdf.
(xxxi) (xxxi) The budget changes the definition of “person”, but also the definition of “grantor”. NY Tax Law Sec. 1401
(xxxii) Part O, Section 1. https://nyassembly.gov/leg/?default_fld=%0D%0A&leg_video=&bn=A03009&term=&Summary=Y&Actions=Y&Memo=Y&Text=Y.
(xxxiii) Part O, Section 5. Except for carriage under binding written contracts entered into on or before April 1, 2021, provided that the date of execution of that contract is confirmed by independent evidence such as the record of the contract Contract, payment of a deposit, or other facts and circumstances determined by the Commissioner of Taxation and Finance.
(xxxiv) The actual and not the title-giving authority should come first.
(xxxv) The five-letter verb that begins and ends with "e" – e _ _ _ e "- that shouldn't break the fence of a tax advisor's teeth to paraphrase Homer.
(xxxvi) See the first page of CT-3-S or IT-204.
(xxxvii) Not to mention sales tax and wage tax.