Window of Opportunity To Avoid Increased New York Transfer Tax

New York state tax on transfers of real estate ("stamp duty") will increase substantially on July 1 (with limited exceptions). The changes will affect transfers of residential and nonresidential property but, in the short term, there are opportunities to avoid the increases.

On July 1, 2019, the transfer tax on many conveyances of New York City residential property (frequently called a "mansion tax") increases substantially. Until then, sales of residential property priced at $1 million or more are taxed at one percent of consideration. For conveyances of more than $2 million, the parties can achieve substantial savings by closing the transaction by June 30.

Beginning July 1, the current one percent rate will be replaced with the following banded rate structure:

Significantly, in addition to the possible tax savings from completion of conveyances before July 1, 2019, well-informed parties will avoid selling property at the bottom of any band. For example,

• If consideration for a conveyance is $9,999,999 and the transaction is completed before July 1 , the mansion tax due will be $100,000.
• If the same transaction is completed on or after July 1, the mansion tax due will be $225,000.
• If the consideration increases by $1 (to $10 million) and the transaction is completed on or after July 1, the mansion tax due will be $325,000.

The outsized significance of the $1 change is attributable to statutory language that causes an entire transaction to be taxed at a single rate. This is in contrast to the marginal rate approach used in income taxes, whereby the higher tax rate is applicable only to the portion of a taxpayer's income that exceeds the lower bound. Thus, in the example above, if a marginal rate approach applied to the mansion tax, only the extra $1 would be taxed at 3.25% (instead of the current result, under which the entire transaction is taxed at 3.25%). Moreover, a faithful application of a marginal rate approach would yield the following mansion tax on a $10 million transaction:

This result is fairer and consistent with a fundamental tax policy objective of not setting traps for those who are uninformed as to a tax's intricacies. However, the underlying policy appears to be intended to exact taxes from most purchasers – particularly the ultra-wealthy – and that is certainly the effect. Therefore, if (a) the state is budgeting for collections of $325,000 on $10 million taxable transactions completed on or after July 1, and (b) the number of such transactions is believed to be unaffected by the amount of mansion tax due, then obtaining any mitigating changes to the statute will be very difficult. As of now, no one appears to be seeking a further change to the statute. 

The mansion tax is typically paid by a residential purchaser, while the seller of residential and nonresidential property typically pays the New York state transfer tax (transfer tax).  

The new law also increases the transfer tax. For conveyances occurring before July 1, the transfer tax is imposed at 0.4% of consideration for the property. For conveyances occurring on or after July 1, the tax is 0.65% for nonresidential real properties transferring for consideration of $2 million or more, and 0.65% for residential real properties transferring for consideration of $3 million or more. 

Clients wishing to complete transactions before the tax increases come into effect, should insist in their contracts on the closing date being "time of the essence." Otherwise, customary practices in New York may allow the date to be extended into July, defeating the short opportunity for savings.

In certain circumstances, conveyances established pursuant to a contract that was binding as of April 1 will not be subject to the increased tax rates even if they close on or after July 1. Securing the benefits of this grandfathering provision requires providing sufficient proof of the date the contract became binding. Therefore, anyone potentially benefiting by this provision should consult with counsel to ensure documentation requirements are met.