On January 17, 2017, New York State Governor Andrew Cuomo released the 2018 New York State Executive Budget (Executive Budget) including proposed revenue legislation (the "2018 NY Budget Revenue Legislation").¹ If enacted, Parts JJ and KK of the 2018 NY Budget Revenue Legislation would expand the controlling interest transfer tax rules by amending the definition of "conveyance" for purposes of the Real Estate Transfer Tax (RETT) and change the manner in which the base for the tax (i.e., consideration) is calculated. As of the date of this alert, the Executive Budget is with the New York State Legislature for approval and/or amendment. Once the Governor completes his review of the Legislature's amendments, an Enacted Budget Report will be issued. This typically occurs in early April. The Governor's office estimates that the changes to the RETT law would result in additional annual revenue of $4 million for Fiscal Year 2018 and $5 million annually thereafter. Because of the unique way the RETT law is administered, these changes could have significant implications not only for direct transfers of real estate located in New York but also due to the sale or other transfer of stock corporations or interests in partnerships, limited liability companies and other legal entities that own or lease, directly or indirectly, real property located in New York.

The New York State RETT is imposed on each conveyance of real property or interest in real property when the consideration exceeds $500.² The tax is computed at a rate of $2 for each $500 of consideration or fractional part thereof (0.4%).³ In addition, and quite differently than most other states, the RETT tax also is imposed on the transfer of a "controlling interest" in an entity that owns or leases New York real property.⁴ A controlling interest is defined as 50% or more of the combined voting power or capital, profits or beneficial interest in the case of a corporation, or 50% or more of the capital, profits or beneficial interest in a partnership, association, trust or other entity.⁵ The transfer of a minority interest (less than 50%) in an entity holding New York real estate is generally not subject to transfer tax.

2018 NY Budget Revenue Legislation Amendments

The 2018 NY Budget Revenue Legislation would amend the definition of "conveyance" under the RETT law to include the transfer of an interest in an entity⁶ that owns an interest in New York real property, where such New York real property has a fair market value (FMV) greater or equal to 50% of all the assets of the entity on the date of transfer.⁷ In essence, the 2018 NY Budget Revenue Legislation proposes to expand the transfer tax base to include all transfers of interests in partnerships, limited liability companies, S corporations and certain non-publicly traded C corporations that have fewer than 100 shareholders and where New York real property comprises 50% or more of the assets of the entity. The 2018 NY Budget Revenue Legislation further specifies that only assets held for at least two years prior to the date of transfer would be used in determining the fair market value of all of the entity's assets (for purposes of computing the denominator of the 50% test) on the date of transfer.

In addition, and perhaps significantly more complicated for entities with real property interests in New York, the 2018 NY Budget Revenue Legislation proposes that in the case of a transfer of an interest in such entities, consideration would be calculated by multiplying: (1) the fair market value of the New York real property owned by the entity being transferred, by (2) the percentage of the entity that is being transferred.⁸ As a result, a 5% transfer in an entity that owns New York real estate is subject to the RETT based on the fair market value of the real property multiplied by 5%.

Note that the language concerning the consideration calculation appears to be broader than the conveyance imposition by including non-publicly traded C corporations with 100 or few shareholders while the redefined term "conveyance" includes non-publicly traded C corporations with less than 100 shareholders.⁹

Implications

Expanding the definition of "conveyance" to include all transfers of an interest in an entity that holds New York real property, rather than only the transfer of a controlling interest (greater than 50% interest), will impact a significant number of companies as small transfers may now be subject to the RETT. If enacted, these provisions will significantly expand the burden on tax payers and the taxing authorities alike in dealing with the application of these rules.

To the extent practical, taxpayers may want to consider their current and future structures in New York to identify any entity that may be impacted by these provisions in the future. If enacted, these changes would take effect immediately upon enactment and apply to transaction occurring on or after the effective date¹⁰ (generally, April 1, 2017, if the overall budget plan is adopted as it customarily has been over the past few years).

The State and Local Tax Real Estate Team is monitoring the progress of the Executive Budget and the 2018 NY Budget Revenue Legislation in particular. Please contact EY to discuss the implications of the proposed legislation on the impact to any current or planned sales of entities holding New York State real property.

———————————————

———————————————
ENDNOTES

¹ FY 2018 New York State Executive Budget, Revenue Article VII Legislation (the "2018 NY Budget Revenue Legislation") (available on the Internet here (last accessed on Feb. 8, 2017)).

² N.Y. Tax Law Section 1402(a).

³ Id.

⁴ N.Y. Tax Law Section 1401(e) (defining "conveyance").

⁵ N.Y. Tax Law Section 1401(b) (defining "controlling interest").

⁶ 2018 NY Budget Revenue Legislation, Part JJ, Section1 (amending N.Y. Tax Law Section 1401(e)). Specifically, "a partnership, limited liability corporation [sic], S corporation or non-publicly traded C Corporation with fewer than one hundred shareholders." Presumably, the reference to a limited liability corporation should be to a limited liability company.

⁷ Id.

⁸ 2018 NY Budget Revenue Legislation, Part JJ, Section 2 (amending N.Y. Tax Law Section 1401(d) by adding a new paragraph (vi)).

⁹ Compare 2018 NY Budget Revenue Legislation, Part JJ, Section 1 (amending N.Y. Tax Law Section 1401(e)) with id. Section 2.

¹⁰ See 2018 NY Budget Revenue Legislation, Part JJ, Section 3 ("This act shall take effect immediately and shall apply to transfers occurring on and after the effective date."