Legal Line Question of the Week Transfer Taxes and Grossed up Consideration Q: I represent the prospective purchaser of a new construction condominium unit. In speaking with the sales office for the sponsor, I was informed that my purchaser is responsible for paying both the New York City and New York State transfer taxes. I thought that the obligation to pay transfer taxes was the responsibility of the seller. Can you please explain? A: Generally, when real property (or a co-op apartment) is sold in New York City, the seller is responsible for paying both the New York State and New York City transfer taxes. In residential real estate transactions where the purchase price is greater than $500,000, the New York City transfer tax equals 1.425% of the purchase price (and where the purchase price is $500,000 or below, the New York City transfer tax is 1% of the purchase price). The New York State transfer tax is .4% of the purchase price. Q: New York state law permits a seller to shift the burden of paying transfer taxes to a purchaser. Often times, the sponsor in new construction deals will shift the burden of paying transfer taxes to a purchaser. The obligation of a purchaser to pay the seller’s transfer taxes must be set forth in the contract of sale entered into by the parties. Important Tip: When a purchaser pays the seller’s transfer taxes, the amount of the transfer taxes paid by the purchaser is then added to the purchase price and the transfer taxes are then calculated on what is called the “grossed up consideration.” By way of example, if the purchase price is $1,000,000 and the seller pays the transfer taxes, then the seller will be responsible for $14,250 in New York City transfer taxes and $4,000 in New York State transfer taxes. However, in a situation where the purchaser pays the seller’s transfer taxes, the combined $18,250 in transfer taxes are added to the purchase price and then the transfer taxes are recalculated using the grossed up consideration amount of $1,018,250. The issue of “grossed up consideration” is very important when the purchase price approaches $1,000,000. If the consideration (or grossed up consideration) is $1,000,000 or more, then the purchaser will be required to pay what is commonly referred to as the “Mansion Tax”. The Mansion Tax equals 1% of the consideration and is generally the responsibility of the purchaser. Accordingly, real estate brokers should be aware of the transfer tax implications when the purchase price is close to $1,000,000 and the purchaser agrees to pay the seller’s transfer taxes. Towards that end, even if the purchase price was initially less than $1,000,000, if the purchaser agrees to pay for the sponsor’s transfer taxes, then the grossed up consideration could increase to $1,000,000 or more, thereby implicating the Mansion Tax. Neil B. Garfinkel, REBNY Broker Counsel Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP
Posted on: Thu, 11 Jul 2013 21:08:00 +0000
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