While much of the focus of our blog to date has been on federal tax reform, tax reform is also a hot topic at the state and local level. One area that we are following is the proposed expansion of the New York State Real Estate Transfer Tax (“NY State RETT”) contained in Governor Cuomo’s 2017-2018 budget proposal.
This proposal, introduced in the New York State Legislature on January 23 (as part of the Revenue Article VII Bill), would expand the NY State RETT to apply to transfers of minority interests in certain entities holding New York State real property if the value of the real property is at least 50% of the value of all of the entity’s assets. If enacted, this would amount to a significant expansion of the tax. There is a separate New York City real estate transfer tax which is not implicated by the Governor’s proposal. See Part JJ (p. 79) of the proposed legislation and Part JJ (p. 39) of the official Memorandum of Support.
Current Law. NY State RETT is generally imposed at a rate of 0.4 percent on transfers of interests in real property, including transfers of a “controlling interest” in an entity with an interest in New York real property (regardless of the relative value of the entity’s real estate assets). A “controlling interest” generally means 50% or more of the voting stock of a corporation or 50% or more of the capital, profits or beneficial interest in a partnership, association, trust or other entity. Separate transfers may be aggregated in some circumstances.
Proposed Legislation. Governor Cuomo’s budget proposal would extend NY State RETT to transfers of any percentage interest, including a minority interest, in certain entities that own real property located in New York with fair market value of at least 50% of the total value of the entity’s assets. The entities covered by the proposal are partnerships, LLCs, S-corporations and non-publicly traded C-corporations with fewer than 100 shareholders.
- The rule appears to reach transfers of interests in all partnerships, LLCs and S-corporations that own sufficient amounts of New York State real property, regardless of how many equityholders such entity has. For example, this rule could apply tax to transfers of interests in a master limited partnership that, while publicly traded, is a partnership both for state legal and tax purposes. Although this rule does not appear to be targeted at REITs (which are C-Corporations for U.S. federal income tax purposes), the drafting creates some ambiguity as to whether this rule may apply to tax transfers of interests in REITs that are organized as LLCs or partnerships (even if the REIT is publicly traded). It could also apply to REITs organized as C-corporations that do not have 100 shareholders at the time of the transfer (for example, during the first taxable year for which the entity elects to be taxed as a REIT).
- The tax would be applied to “consideration” equal to the gross value of the entity’s real property located in New York multiplied by the percentage of the entity transferred. Gross real property value will often far exceed the actual consideration received for the equity transfer, which is based on net equity value.
- The proposal contains an “anti-stuffing” rule that disregards assets acquired within two years of the transfer when determining the value of all of the entity’s assets. As currently drafted, this rule would appear to cause NY State RETT to apply to any transfer of an interest in an entity within its first two years of operations if the entity holds any New York real estate at all.
- The proposal does not replace the current controlling interest provision. It is unclear whether the two provisions might inappropriately overlap in certain contexts, particularly when the aggregation rule applies.
The bill is currently under joint consideration by the New York Senate Finance and Assembly Ways and Means committees. We have been told to expect the Senate and Assembly to report their versions of the budget next week, with joint committee conferences to take place thereafter. Bills effectuating the budget are generally passed by the New York State Legislature in late March or April, and it is possible that the proposal will be modified before then.