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A corporation, partnership or other business entity conveying its interest in whole or in part in real property for consideration will, as a general rule, be subject to transfer tax. However, a transfer or acquisition of a controlling interest in a corporation or partnership having an interest in real property can also create transfer tax consequences.
A transfer or acquisition of a total of 50% or more of the voting stock, capital, profits or beneficial interests of a corporation or 50% or more of the capital, profits or beneficial interest of a partnership, trust or other entity are deemed controlling interests. NYC adds to this definition, 50% or more of the total fair market value of all classes of stock. NYS adds to this definition 50% or more of the capital, profits or beneficial interest in the voting stock of the corporation. No tax will be due if the entity whose interest is being acquired does not itself own at least a 50% interest in NY real property.
The types of interests subject to taxation include a fee, leasehold, a beneficial interest, an encumbrance, development rights, air rights, options to purchase, contracts of sale, and rights to use or occupy real property or to receive income, profits or rents from real property. Not subject to taxation are rights of first refusal to purchase real property and ownership of notes or other receivables secured by real property.
NYS transfer tax is $2.00 for every $500.00 of consideration. NYC real property transfer tax is calculated at 1% of consideration when the consideration is $500,000 or less, and 1.425% of consideration when consideration is greater than $500,000, for a 1-3 family dwelling or an individual residential condominium or cooperative unit. For all other types of property, the NYC real property transfer tax rate is 1.425% for consideration of $500,000 or less and 2.625% for consideration in excess of $500,000.
NYS defines taxable consideration as the fair market value of the real property or interest in real property, based on the percentage of the ownership interest transferred or acquired in the entity. NYC adds to this definition, the fair market value of all assets owned by the entity, including the real property or interest therein.
The first part of the rule considers whether a person or group of persons, either transferors or transferees, have acted in concert to transfer or acquire a controlling interest. The second component examines whether the separate transfers or acquisitions have been made within three years of one another. Thus if a corporation undertakes two transfers or acquisitions within 3 years of one another and the combined transfer or acquisition amounts to a controlling interest then each transaction is subject to taxation.
In NYS, parties are considered per se to have acted in concert when (a) one of the parties has control or influence over the other; or (b) the parties have contracted to act together for purposes of the transfer or acquisition. Thus a corporation and its subsidiary each transferring or acquiring an interest in an entity owning real property will be subject to transfer tax if the total interest is 50% or greater. If the parties are not commonly controlled or owned then the parties may show that they have not acted in concert by providing sworn statements that their acts are independent of one another.
In NYC, transfers within three years of each other are presumed related and therefore aggregated. If the transactions are unrelated, it becomes the taxpayer’s burden to prove that the transactions are in fact independent.
Multiple transfers conducted outside the three year period are not presumed to be related. However, if there is evidence that the transactions occurring outside the 3 year period are intentionally timed to occur more than three years apart as part of a plan to avoid the real estate transfer tax, then the transfers or acquisitions will be aggregated.
The TP-584 must be filed and tax paid within 15 days of a transfer or acquisition of a controlling interest in an entity owning an interest in New York real property. If the transfer involves an aggregation of a transfer or an acquisition, then the filing and transfer tax are due within 15 days of the last transfer or acquisition.
Documents executed outside the United States can be notarized by United State consuls wherever United States embassies may be found. If a U.S. embassy is not a viable option, a document may be authenticated via an apostille. An apostille is an internationally recognized certificate that authenticates the signature on, and the capacity in which a signatory signs, a public document.
Apostilles however are available only in those countries that are signatories to the 1961 Hague Convention. The following countries are Hague signatories and can therefore issue apostilles that will be recognized by the United States, which is itself a Hague signatory: Albania, Andorra, Antigua and Barbuda, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahamas, Barbados, Belarus, Belgium, Belize, Bosnia and Herzegovina, Botswana, Brunei, Bulgaria, Cape Verde, Colombia, Cook Islands, Costa Rica, Croatia, Cyprus, Czech Republic, Kingdom of Denmark, Dominica, Dominican Republic, Ecuador, El Salvador, Estonia, Fiji, Finland, France, Georgia, Germany, Greece, Grenada, Honduras, Hong Kong, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Kazakhstan, Kyrgyzstan, Latvia, Lesotho, Liechtenstein, Lithuania, Luxembourg, Macau, Macedonia, Malawi, Malta, Marshall Islands, Mauritius, Mexico, Moldova, Monaco, Mongolia, Montenegro, Namibia, Netherlands, New Zealand, Niue, Norway, Oman, Panama, Peru, Poland, Portugal, Romania, Russia, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, San Marino, São Tomé and Príncipe, Serbia, Seychelles, Slovakia, Slovenia, South Africa, South Korea, Spain, Suriname, Swaziland, Sweden, Switzerland, Tonga, Trinidad and Tobago, Turkey, Ukraine, United Kingdom, Vanuatu and Venezuela.
The government of each signatory country designates who is a “competent authority” and is thereby capable of issuing an apostille. To determine who is a competent authority, go to the Apostille Section of The Hague Conference website. Once the apostille is affixed to the document to be recorded, it may then be submitted for recording in the same manner as a document notarized by a U.S. consul.
On August 16, 2010, Federal Housing Finance Agency (FHFA) issued a proposed guidance on private transfer fees. The guidance stated that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) should not purchase or invest in mortgage on properties encumbered by private transfer fee covenants or securities backed by these mortgages. The guidance also stated that Federal Home Loan Banks should not purchase or invest in these mortgages or use them as collateral for advances. FHFA’s primary target are private transfer fee covenants that are attached to real property by property developers that are paid to the developer or its trustee upon each resale of the property.
During the public comment period for the guidance (which ended on October 15, 2010) FHFA received over 4,000 comments from numerous entities including American Land Title Association, National Association of Realtors, and the American College of Real Estate Lawyers. Many of those opposed to transfer fees argued that the fees would not provide any tangible benefits to the encumbered properties, deprive homeowners of their equity, and impair the marketability and transferability of these properties. Comments were also submitted by homeowner’s associations, condominium and cooperatives who were concerned that the overbroad restriction would ban flip taxes, capital contributions, and similar devices needed by these entities to fund the capital reserves or capital improvements crucial to the proper operation and maintenance of their buildings.
On February 1, 2011 the FHFA chose not to implement the guidance and instead issued a narrower approach in the form of a notice of proposed rulemaking. The notice of proposed rulemaking published on February 8, 2011 continues to restrict Fannie Mae, Freddie Mac and the Federal Home Loan Bank System from dealing in mortgages on properties encumbered by certain types of private transfer fee covenants and in certain related securities, by proscribing payments to investors. However, it specifically excepts private transfer fees paid to homeowner associations, condominiums, cooperatives and certain tax-exempt organizations that use the fees to directly benefit affected property owners. It also applies prospectively, so private transfer fee covenants created before the publication date of the rule would not be subject to the rule, and therefore continue to be valid and enforceable.
The comment period for the notice of proposed rulemaking ended on April 11, 2011. The FHFA is now considering all comments to the revised rule and will issue a final rule. Regulated entities will have 120 days following the publication of the final rule to comply.
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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