New York Governor Andrew Cuomo introduced his FY 2018 budget proposal on January 17. The proposal includes several significant revenue-raisers, including a few that could impact the New York real estate market.
- Income Tax – Sourcing of Gain From Sale of Interests in Entities Holding Co-op Shares – Currently, if an individual who is not a New York resident sells shares in a cooperative housing corporation that holds New York real property, any resulting gain is treated as New York-source income, subject to New York personal income tax. However, current law is unclear as to whether a similar sourcing rule applies to gain from the sale of ownership interests in other legal entities where more than 50% of the entity’s assets consist of shares in a cooperative housing corporation that owns New York real estate. As a consequence, some nonresidents planning the sale of shares in a New York co-op will first contribute the shares to an entity, such as a partnership, and then sell the interests in the entity, taking the position that the resulting gain is not New York-source income. The proposal would end this sourcing play by expanding the definition of New York real property for personal income tax purposes to include ownership interests in entities that own shares of cooperative housing corporations that own co-op units located in New York.
- Real Estate Transfer Tax – Elimination of Partnership “Loophole” – Under current law, New York real estate transfer tax applies to transfers of a controlling interest in certain legal entities that hold an interest in New York real property. New York Tax Law § 1401(e). This provision does not prevent property owners from conveying a less than controlling interest in New York real property free of transfer tax by first contributing the property to a legal entity, and then selling a less than 50% interest in the legal entity to the intended transferee. The proposal would close this “loophole” by expanding the definition of “conveyance” for purposes of the transfer tax to include all transfers of interests in partnerships, limited liability companies, S corporations and certain closely held C corporations, where New York real property constitutes 50% or more of the assets of the entity. In addition, the proposal provides that “consideration” for such a transfer would be calculated by multiplying the fair market value of the New York real property owned by the entity by the percentage ownership interest in the entity conveyed. (For example, if 10% of the ownership interests in a partnership are transferred and the partnership owns New York real property with a fair market value of $1 million, under the proposal, the transfer would be treated as a conveyance subject to transfer tax for a consideration of $100,000.)
- Real Estate Transfer Tax – Addition of General Anti-Avoidance Rule to “Mansion Tax” – Finally, the proposal would make it harder to avoid the 1% “mansion tax” imposed on transfers of residential real property with a consideration of $1 million or more, by authorizing the Department of Taxation and Finance (the “Department”) to impose the mansion tax on any conveyance “structured in a manner intended to avoid or evade the tax”. For example, under current law, if a developer constructing a new residential building were to enter into separate contracts conveying the vacant land and the building, the developer could claim that that the mansion tax did not apply to the land transfer, because the land was vacant at the time of the conveyance. The legislation would authorize the Department to treat both contracts as conveyances to the mansion tax if the purposes of the separation of the contracts was to avoid or evade the tax.
We will provide additional updates in the blog as the budget proposal progresses.
Today’s guest blogger, Michael Jacobs is a member of Reed Smith’s State Tax Practice Group, composed of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues.