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In this issue, we will address the various transfer tax issues raised on conveyances of real property pursuant to a divorce decree, settlement agreement or separation agreement.
Conveyances for no consideration made between spouses are a common occurrence. Such conveyances may be made for a host of purposes, such as the making of a gift, estate planning, and loan eligibility.
In all of these instances, no money is being exchanged. The transfer is without consideration and is not in connection with a sale. As a consequence, gift transfers or transfers made without consideration are not subject to transfer tax. Both the NYS real estate transfer tax return (TP-584) and the NYC RPT real property tax return (NYC-RPT) list no consideration transfers among the types of conveyances that are exempt from transfer tax.
But what of conveyances made pursuant to divorce decree or separation agreement? In such instances, no money is being exchanged. Is the transfer without consideration and not in connection with a sale?
At first glance, one might assume that because no money is actually being paid, the conveyance is without consideration and not in connection with a sale. Schedule I of the NYC-RPT addresses this issue. It asks for four pieces of information: the fair market value, the existence of any unpaid mortgages, the percentage of ownership interest being transferred to the other spouse, and any alternate value assigned to the transferred interest that is recited in the settlement agreement, separation agreement or divorce decree. The basis for taxation is found in Section 23-03(d)(3) of Title 19 of the Rules of the City of New York (“RCNY”). This section states that “a conveyance of realty from one spouse to the other pursuant to the terms of a separation agreement” is subject to tax.
Because the TP-584 does not contain a schedule similar to the NYC-RPT, and in fact does not address the matter in its instructions, it might appear as though the State of New York takes a different approach to transfers pursuant to divorce decrees or settlement agreements. It does not. The basis for taxation on the State level is found in Title 20 of the New York Codes, Rules and Regulations section 575.11(a)(10) (“NYCRR”). This section states that “a conveyance from one spouse to the other pursuant to the terms of a divorce or separation agreement is subject to tax.”
If such transfers are subject to transfer tax, what exactly is the nature of the consideration? The RCNY states that the consideration for the transfer is the relinquishment of marital rights.
The next question becomes, if no monies are being exchanged, how is consideration to be established for purposes of calculating NYC and NYS transfer tax? Any thought of assigning an artificially low consideration to the transfer should be dismissed because both New York State and New York City presume that consideration for the transfer is equal to the fair market value of the interest in the property being conveyed. This presumption is found in both Title 19 RCNY Section 23-03(d)(3) and in Title 20 NYCRR section 575.11(a)(10). This presumption may be rebutted if the purchase price is stated in the divorce decree, separation agreement or settlement agreement. Such documents should also be reviewed for liability of transfer tax payments. If the decree or agreement states that the grantee spouse is responsible for payment of all taxes, then the value of the transfer taxes paid by the grantee must be added to the consideration, and the tax recalculated. If the consideration is based upon the fair market value of the premises, then the consideration will be the fair market value multiplied by the grantor’s percentage of ownership at the time of the transfer. Unless otherwise stated in the deed, a transfer to a husband and wife is presumed to be a tenancy by the entirety, each with a 50% interest.
To reduce the likelihood of a possible audit by the NYC Department of Finance and/or the NYS Department of Taxation of Finance, evidence of the consideration, whether in the form of an appraisal, or copies of the relevant portions of the divorce decree, settlement agreement or separation agreement, should be attached to the tax forms.
Any existing mortgages must be added to the fair market value or the value specified in the court order, settlement agreement, or separation agreement, for purposes of calculating the consideration. However, when the property being transferred is a one-, two-, or three-family house, an individual residential cooperative apartment or individual residential condominium unit, or economic interest in such property, the existing mortgage may be excluded from consideration. The NYC-RPT instructions state that, “an existing mortgage will be excluded in all transfers pursuant to gifts or divorce.”
As with any conveyance, a failure to pay transfer taxes will be penalized. The penalty for nonpayment of NYC real property tax is up to 5% of the tax due per month. The New York State penalty is 10% of the tax due plus interest. Since the grantee is liable for payment of the transfer tax, if not paid by the grantor, it is essential that the tax is calculated properly and filed in a timely manner.
The City Register’s borough offices have been consolidated into one office located at 66 John Street, in Manhattan. At this time, the borough offices in Brooklyn, Queens and the Bronx will remain open only for document drop-offs and pick-ups for multiple real property transfers, and research. Payments for recordings and transfer taxes cannot be made at these locations.
Since all payments of recording fees and transfer taxes can be made only in the Manhattan office, individual recordings must be brought to the Manhattan location only. To make payment by check, go to the City Register on the 13th floor. To make payments by cash or credit card, go to the Business Center on the 2nd floor.
All inquiries regarding rejected recordings may be directed to the Manhattan location, or via email.
Property owners can alert themselves to fraudulent documents recorded in the City’s real property records. Under the “Notice of Recorded Document Program”, a property owner can be notified by the NYC Department of Finance whenever certain documents affecting their ownership have been recorded in the five boroughs of New York City. These documents include deed, mortgages and related documents affecting real property ownership. The City Register can notify property owners, or their designated agents (child, spouse, domestic partner), managing agent, attorney, lienor, or fiduciary of owner’s estate. Notifications will be made to the property owner by either email or text message. For more information, go to https://a836-acris.nyc.gov/nrd/default.aspx or visit the NYC Department of Finance’s website.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. at (212) 651-1200 or keng@prestitle.com.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
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