N.Y. Comp. Codes R. & Regs. tit. 20 § 575.11

Current through Register Vol. 46, No. 25, June 18, 2024

Section 575.11 - Examples of taxable and nontaxable conveyances

(a) The following are examples of conveyances which are subject to the real estate transfer tax.

(1) A conveyance in exchange for other property is taxable. If the other property is real property or an interest therein, the tax will apply to both conveyances.

(2) A conveyance by a defaulting mortgagor or debtor to the mortgagee or lienor, or its agent, nominee or an entity owned in whole by such mortgagee or lienor, in lieu of an action to foreclose a mortgage or lien, is subject to tax.

(i) In the case of nonrecourse debt, where the grantee is the mortgagee or lienor, or its agent, nominee or an entity wholly owned by such mortgagee or lienor and the amount of any other liens or encumbrances as described in clause (b) of this subparagraph secures nonrecourse debt only, consideration includes, but is not limited to, the sum of the following:

(a) the unpaid balance of the debt secured by the mortgage;

(b) the total amount of any other liens or encumbrances remaining on the real property after the conveyance, whether the underlying indebtedness is assumed or taken subject to (see section 575.1[d][1] of this Part for information on the treatment of continuing liens); and

(c) the sum of any other amount paid by the grantee for the real property. This sum shall not include any state or local transfer taxes paid by the grantee in connection with the conveyance, provided that the grantee has not contractually assumed the liability for the payment of such taxes or has not released its right to seek recovery of the payment from the grantor.

(ii) In the case of recourse debt, where the grantee is the mortgagee or lienor, or its agent, nominee or an entity wholly owned by such mortgagee or lienor and the amount of any other liens or encumbrances as described in clause (i)(b) of this paragraph secures recourse debt only, consideration includes, but is not limited to, the sum of the amounts described in clauses (i)(a)-(c) of this paragraph.

Provided however, where the sum of the amounts described in such clauses (a) and (b) of such subparagraph exceeds the fair market value of the real property as of the date of conveyance, such consideration shall be the fair market value of the real property plus the amount described in such clause (c) of such subparagraph as the aggregate amount of debt cancelled, assumed or taken subject to in connection with the conveyance is limited to the fair market value of the real property. For purposes of this subdivision, a debt is recourse debt to the extent that, as of the date of conveyance, the grantor or a person related to the grantor including any guarantor, bears the economic risk of loss for the debt beyond any loss attributable to the value of the property securing the debt.

Example 1:

Bank A made a nonrecourse loan of $10 million to individual X secured by a mortgage on New York State real property owned by X. X also provided a personal recourse guarantee of the last $1 million of the debt, that is, if the value of the mortgaged real property decreased to less than $10 million X would be obligated to pay the difference between $10 million and the value of the mortgaged real property to Bank A up to a maximum amount of $1 million. X defaulted on the loan. The real property was conveyed to Bank A in lieu of foreclosure and, at the time of the conveyance, the real property had a fair market value of $8 million. As a result of the conveyance the $9 million nonrecourse component of the loan is discharged. Simultaneously, Bank A discharged X from any obligation under the personal guarantee. The consideration for the conveyance consists only of the $9 million nonrecourse component of the loan that was discharged, as no part of the excess $1 million personal obligation can be satisfied by the conveyance of the real property.

Example 2:

Same facts as Example 1, except that instead of the personal guarantee being on the last $1 million, X guaranteed the first $1 million i.e., X would be liable for any deficiency only if the mortgaged real property was worth less than $1 million. Since the fair market value of the real property at the time of the conveyance was $8 million, there was no continuing recourse exposure to X, and therefore the consideration for the conveyance is equal to $10 million, which was the full amount of the nonrecourse indebtedness discharged as a result of the conveyance of the real property.

Debt that was originally nonrecourse and which was converted to recourse debt will be so treated as recourse debt provided that the conversion to recourse debt and the conveyance of the real property are not, in substance, integrated steps or part of a plan to decrease the consideration for the conveyance so as to decrease the tax for the conveyance.

(3) A conveyance pursuant to a mortgage foreclosure or any other action governed by the provisions of the Real Property Actions and Proceedings Law, such as the enforcement of a mechanic's lien pursuant to article 3 of the Lien Law, is subject to tax. The consideration is determined as follows:

(i) In the case of a nonrecourse debt, where the grantee is the mortgagee or lienor or its agent, nominee or an entity wholly owned by such mortgagee or lienor, and the amount of any other continuing liens or encumbrances secure nonrecourse debt only, consideration includes, but is not limited to, the higher of the following:

(a) the sum of:

(1) the price paid by the grantee (the bid price); and

(2) the total amount of any other liens or encumbrances remaining on the real property after the conveyance, whether the underlying indebtedness is assumed or taken subject to (see section 575.1[d][1] of this Part for information on the treatment of continuing liens); or

(b) the sum of:

(1) the amount of the judgment of foreclosure; and

Provided however, in the case where the amounts described in clauses (a) and (b) of this subparagraph involve recourse debt only and the higher of such amounts exceeds the fair market value of the real property at the time of the conveyance, then the consideration is equal to the fair market value or the real property as of the date of conveyance, since the aggregate amount of the debt cancelled, assumed or taken subject to in connection with the conveyance is limited to the fair market value of the real property.

(ii) Where a person unrelated to the mortgagee or the lienor is the grantee and regardless of whether the debt is recourse or nonrecourse, consideration includes, but is not limited to the sum of:

(a) the amount of the bid price; and

For the purposes of this paragraph and paragraphs (2), (15) and (16) of this subdivision a grantee is related to the mortgagee or lienor to the extent that the mere change of identity or form of ownership exemption provided at section 1405(b)(6) of the Tax Law would apply to a conveyance by the mortgagee or lienor to the grantee.

(iii) Where the grantee is an entity beneficially owned in part by the mortgagee or lienor and a person unrelated to the mortgagee or lienor and the debt held by such mortgagee or lienor is nonrecourse debt and any continuing liens or encumbrances secure nonrecourse debt only, consideration includes, but is not limited to, the sum of clauses (a) and (b) of this subparagraph:

(a) the higher of the sum of the following multiplied by the percentage which represents the mortgagee's or lienor's beneficial ownership interest in the grantee:

(1)

(i) the bid price; and

(ii) the total amount of any other liens or encumbrances remaining on the real property after the conveyance, whether the underlying indebtedness is assumed or taken subject to; or

(2)

(i) the amount of the judgment of foreclosure; and

(ii) the total amount of any other liens or encumbrances remaining on the real property after the conveyance, whether the underlying indebtedness is assumed or taken subject to (see section 575.1[d][1] of this Part for information on the treatment of continuing liens); and

(b) the sum of the bid price, and the total amount of any other liens or encumbrances remaining on the real property after the conveyance, whether the underlying indebtedness is assumed or taken subject to, multiplied by the percentage which represents such unrelated person's beneficial ownership interest in the grantee (see section 575.1[d][1] of this Part for information on the treatment of continuing liens).

(iv) Where the grantee is an entity beneficially owned in part by the mortgagee or lienor and in part by a person unrelated to the mortgagee or lienor and the debt held by such mortgagee or lienor is recourse debt and any continuing liens or encumbrances secure recourse debt only, consideration includes, but is not limited to, the sum of clauses (iii)(a) and (b) of this subparagraph.

Provided however, where the higher of the amounts described in subclauses (iii)(a)(1) and (2) of this paragraph exceeds the fair market value of the real property multiplied by the percentage which represents the mortgagee's or lienor's beneficial ownership interest in the grantee, then such portion of consideration as described in such clause (a) is equal to the fair market value of the real property multiplied by such percentage since the aggregate amount of the debt cancelled, assumed or taken subject to in connection with the conveyance is limited to the fair market value of the real property multiplied by such percentage. (See subparagraph [2][ii] of this subdivision for further information on recourse debt.)

(4) A conveyance to a corporation in exchange for shares of its capital stock is subject to tax to the extent that there is a change in beneficial ownership.

(5) A conveyance by a corporation in liquidation or in dissolution to its shareholders is subject to tax to the extent that there is a change in beneficial ownership.

(6) A conveyance of standing timber and mines is subject to tax.

(7) A conveyance by the United Nations, the United States of America, the State of New York, or any of their agencies, instrumentalities or political subdivisions is subject to tax unless the grantee is another of such governmental organizations or entities.

(8) A conveyance by a partner to the partnership as a contribution of partnership assets is subject to tax to the extent that there is a change in beneficial ownership.

(9) A conveyance of a perpetual easement or an easement for a term of years or part of a year is subject to tax.

(10) A conveyance from one spouse to the other pursuant to the terms of a divorce or separation agreement is subject to tax. (There is a rebuttable presumption in such case that the consideration for the conveyance, which includes the relinquishment of marital rights, is equal to the fair market value of the interest in the real property conveyed.)

(11) A conveyance to partners upon the termination and liquidation of a partnership is subject to tax to the extent that there is a change in beneficial ownership.

(12) A conveyance by a sponsor to a cooperative housing corporation is subject to tax. (Consideration in such case includes the amount of cash received by the sponsor, the amount of any mortgages, liens or encumbrances on the real property and the fair market value of the shares in the cooperative housing corporation which are transferred to the sponsor.)

(13) A conveyance of real property to an industrial development agency (IDA) by a person who is not the beneficiary of the IDA financing, at the direction of such beneficiary, with such beneficiary subsequently leasing the property from the IDA, is subject to tax. In such a conveyance, the beneficiary of the IDA financing and not the IDA is deemed to be the grantee, and therefore the exemption described at section 575.9(c)(1) of this Part does not apply.

(14) A conveyance of real property by an IDA to a person who is not the beneficiary of the IDA financing where such conveyance is made at the direction of such beneficiary is subject to tax. In such a conveyance, the beneficiary of the IDA financing is deemed to be the grantor of the conveyance.

(15)

(i) A conveyance of real property pursuant to a secured party's enforcement of a lien, security interest or other rights on or in shares of stock in a cooperative housing corporation and/or associated proprietary lease, upon default by a debtor is subject to tax. In such a conveyance, the grantor is the defaulted debtor and the grantee is the secured party or its agent, nominee or an entity wholly owned by such secured party who enforces such lien, security interest or other rights on or in such shares and/or associated proprietary lease(s). Consideration, in the case of nonrecourse debt, where the grantee is the secured party, or its agent, nominee or an entity wholly owned by such secured party, includes but is not limited to, the sum of the following:

(a) the unpaid balance of the debt secured by the shares of stock in the cooperative housing corporation and/or associated proprietary lease(s);

(b) the total amount of any other liens, security interests or other obligations remaining on the shares of stock in the cooperative housing corporation and/or associated proprietary lease(s) after the conveyance, whether the underlying indebtedness is assumed or taken subject to (see section 575.1[d][1] of this Part for information on the treatment of continuing liens);

(c) a pro rata portion of the total amount of any other liens or encumbrances that remain on the real property of the cooperative housing corporation after the conveyance. However, see section 575.1(d)(6) of this Part for information on the treatment of liens or encumbrances on the real property of the cooperative housing corporation; and

(d) any other amount paid by the grantee for the real property. This amount shall not include any state or local transfer taxes paid by the grantee in connection with the conveyance, provided that the grantee has not contractually assumed the liability for the payment of such taxes or has not released its right to seek recovery of the payment from the grantor.

(ii) Consideration in the case of recourse debt, where the grantee is the secured party, or its agent, nominee or an entity wholly owned by such secured party, includes but is not limited to the sum of the amounts described in clauses (i)(a)-(d) of this paragraph.

Provided however, where the sum of the amount described in clauses (a) and (b) of such subparagraph exceeds the fair market value of the shares of stock in the cooperative housing corporation and/or associated proprietary lease(s) as of the date of the conveyance, consideration shall be the fair market value of the shares of stock in the cooperative housing corporation and/or associated proprietary lease(s) being conveyed, plus the amounts described in such clauses (c) and (d) of such subparagraph. (See subparagraph [2][ii] of this subdivision for further information on recourse debt.)

Example 1:

A is the owner of 30 shares of stock in a cooperative housing corporation related to a proprietary lease of a commercial unit. The 30 shares represent five percent of the total number of shares in the cooperative housing corporation. The building of the cooperative housing corporation is encumbered by the lien of a mortgage having a current unpaid balance of $2,500,000. A's 30 shares have a fair market value of $1,200,000. A pledged its 30 shares to C as security for a loan of $1,600,000. The debt owed by A to C is nonrecourse indebtedness. The current unpaid balance of the debt is $1,740,000, including accrued interest. C is presently enforcing its security interest against A's shares of stock in the cooperative housing corporation. The consideration for the resulting conveyance is computed as follows:

Unpaid balance of debt	$1,740,000
Pro-rata portion of mortgage indebtedness ($2,500,000 * 5%)	+ 125,000
Consideration for conveyance	$1,865,000

Example 2:

Same facts as in example 1, except that the debt owed from A to C is recourse indebtedness. The fair market value of A's shares of stock in the cooperative housing corporation is less than the sum of the unpaid balance of the debt ($1,740,000). The consideration for the resulting conveyance is computed as follows:

Fair market value of the cooperative shares	$1,200,000
Pro rata portion of mortgage indebtedness ($2,500,000 * 5%)	+ 125,000
Consideration for conveyance	$1,325,000

(16) A conveyance of real property pursuant to a secured party's enforcement of a lien, security interest or other rights on or in shares of stock, partnership interests or other instruments, upon default by a debtor (i.e., the transfer or acquisition of a controlling interest in an entity with an interest in real property), is subject to tax. In such a conveyance, the grantor is the defaulted debtor and the grantee is the secured party or its agent, nominee or an entity wholly owned by such secured party who enforces such lien, security interest or other rights on or in such shares, partnership interests or other instruments. The consideration for such conveyances, where the grantee is the secured party, or its agent, nominee or an entity wholly owned by such secured party, regardless of whether the debt is recourse or nonrecourse, is the lesser of the following:

(i) the fair market value of the real property as of the date of conveyance multiplied by the percentage in the entity being transferred or acquired; or

(ii) the sum which includes, but is not limited to, the following:

(a) a reasonable apportionment to the interests in real property owned by the entity of the unpaid balance of the debt secured by the ownership interest in the entity;

(b) a reasonable apportionment to the interests in real property owned by the entity of the amount of any liens, security interests or other obligations remaining on the ownership interest in the entity after the conveyance, whether the underlying indebtedness is assumed or taken subject to;

(c) a reasonable apportionment to the interests in real property owned by the entity of the amount of any liens or encumbrances remaining on the real property of the entity multiplied by the percentage in the entity being transferred or acquired (see section 575.1[d][1] of this Part for information on the treatment of continuing liens);

(d) a reasonable apportionment to the interests in real property owned by the entity of the amount of any other debt or obligation of the entity multiplied by the percentage in the entity being transferred or acquired; and

(e) a reasonable apportionment to the interests in real property owned by the entity of any other amount paid by the grantee for the conveyance. Such amount shall not include any state or local transfer taxes paid by the grantee in connection with the conveyance, provided that the grantee has not contractually assumed the liability for the payment of such taxes or has not released its right to seek recovery of the payment from the grantor.

Example 3:

X is the owner of 100 percent of the voting stock in Y Corporation. Y Corporation's only asset is a parcel of real property located in New York State. The fair market value of the real property is $2,000,000. The real property is encumbered by the lien of a mortgage having a current unpaid balance of $1,500,000, held by B Bank. X pledged 60 percent of its Y voting stock to Z as security for a debt of $400,000. The current unpaid balance of the debt is $450,000, including accrued interest. Z is presently enforcing its security interest in the voting stock of X. Z's enforcement of its security interest in the voting stock of X results in both a transfer and acquisition of a controlling interest. The consideration for the conveyance is computed as follows:

(a) Unpaid balance of debt	$450,000
Pro rata portion of mortgage indebtedness ($1,500,000 * 60)	+ 900,000
Total,	$1,350,000
(b) FMV of real property-$2,000,000 * 60%=$1,200,000^*

* The amount computed in (b) ($1,200,000) is the consideration for the conveyance as it is less then the amount computed in (a) ($1,350,000).

Example 4:

S is the owner of 100 percent of the voting stock of K Corporation. K's assets consist of a parcel of real property located in New York State and other tangible assets. The fair market value of the parcel of real property is $2,100,000 and the fair market value of the other assets is $300,000. The real property is encumbered by the lien of a mortgage having a current unpaid balance of $700,000. Also, K Corporation has other debts totaling $300,000. S pledged 60 percent of its voting stock to J as security for a debt of $500,000. The current unpaid balance of the debt owed to J is $550,000, including accrued interest. J is presently enforcing its security interest in the voting stock owned by S. J's enforcement of its security interest in the voting stock of S results in both a transfer and an acquisition of a controlling interest. The consideration for the conveyance is computed as follows: Reasonable apportionment based on fair market value of assets owned by K Corporation:

(a) Unpaid balance of debt	$550,000
Part of mortgage indebtedness includible in amount to be apportioned ($700,000 * 60%)	420,000
Part of other debt of entity includible in amount to be apportioned (300,000 * 60%)	+ 180,000
Amount to be apportioned	$1,150,000

Reasonable apportionment based on fair market value of assets owned by K Corporation:

$1,150,000 * ^$2,100,000/_$2,400,000 = $1,006,250^*

(b) FMV of real property- $2,100,000 * 60%= $1,260,000

* The amount computed in (a) ($1,006,250) is the consideration for the conveyance as it is less than the amount computed in (b) ($1,260,000).

(b) The following are examples of conveyances which are not subject to the real estate transfer tax.

(1) A conveyance of real property by the beneficiary of the industrial development agency (IDA) financing to the IDA, in connection with the receipt of such financing is not subject to tax.

(2) A conveyance of real property by the IDA, as grantor, to the beneficiary of the IDA financing, as grantee is not subject to tax.

Footnotes

* The amount computed in (b) ($1,200,000) is the consideration for the conveyance as it is less then the amount computed in (a) ($1,350,000).

N.Y. Comp. Codes R. & Regs. Tit. 20 § 575.11