The gains tax is imposed at the rate of 10% on gains derived from "transfers" of real property, where the property is located in New York State and the "consideration" for the transfer is $1 million or more. Consideration is the price paid or required to be paid for the real property less customary brokerage fees paid by the seller or transferor. Consideration includes the cancellation or discharge of the transferor's debt or obligation. In addition, consideration could include any payment for an option or a contract to purchase real property.

Transfers subject to tax include direct transfers, such as sales, creation of a leasehold or sublease (if certain conditions are met), exchanges, mortgage foreclosures, transfers in lieu of foreclosure, and taking by eminent domain. In addition, indirect transfers, such as the acquisition of a controlling interest in an entity that owns real property or an interest in real property, are subject to tax. Indirect transfers include transfers of corporate and partnership interests. In addition, transfers pursuant to cooperative and condominium plans are subject to the gains tax if the aggregate consideration will be $1 million or more.

Certain transactions are exempt from the tax, because they are excluded from the statutory definition of a taxable transfer of real property. These exemptions include transfers pursuant to bequest or inheritance and most mortgage transactions, except for mortgage foreclosures. In addition, exemptions from gains tax will be allowed in the following cases: 1. Transfers where the consideration is less than $1 million; 2. Transfers of personal residences; 3. Transfers by governmental agencies and charitable organizations; 4. Transfers to controlled corporations; 5. Transfers consisting of a mere change of identity or form of ownership; 6. Transfers pursuant to written contracts entered into (and adhered to) prior to March 28, 1983; and 7. The execution of a contract to sell real property or grant of an option to purchase real property without the use and occupancy of such property.

Computing the Gain

The tax is based on the transferor's gain, which is the excess of the consideration over the "original purchase price." Original purchase price is the consideration paid or required to be paid for the property plus the amounts paid for capital improvements and required legal, engineering and architectural fees incurred in selling. A capital improvement is defined as an improvement, a modification, a betterment, or an addition made to real property that is intended to be permanently affixed and has a useful life substantially beyond the year following installation. In addition, other costs that are clearly associated with the construction of a real estate project and incurred during the construction period can also be included in capital improvements, such as: accounting fees; fees for appraisals required by a construction lender; interest paid during the construction period on loans where the proceeds of such loans were used to make capital improvements to real property; construction period real property taxes; mortgage recording tax (building and loan mortgage only); construction period insurance; and construction period security.

In addition, specific costs necessary to convert property to cooperative or condominium form are includable in original purchase price and include the following: legal, accounting and engineering fees incurred directly as a result of cooperative or condominium formation and transfer of title to the cooperative corporation; filing and recording fees; costs of printing offering plan; title insurance; NYC Real Property Transfer Tax paid as a result of conveyance of title to the cooperative corporation; NYS Real Estate Transfer Tax paid as a result of conveyance to the cooperative corporation; appraisal fees; mortgage recording tax on mortgages created as a result of conveyance of title to the cooperative corporation; mortgage commitment fees; points paid to lender; the cost of "buying down" the interest rate on co-op loans to purchasers; the cost of "buying out" non-purchasing tenants; and amounts paid to relocate non-purchasing tenants.

Gains Tax is Different

Practitioners should be aware that the gains tax is in many ways different from, and is payable in addition to, any federal, state or local income tax that may be payable by reason of the transaction. For example, the concept of original purchase price is not reduced by the allowance for depreciation or amortization, as would be the case in computing a gain for income tax purposes. Under the gains tax law, a loss from the transfer of real property may not offset any gain on another transfer of real property.

Another difference from the federal income tax system is that there is no step-up in basis in connection with transfers at death. An heir must carry over the original purchase price of his or her transferor.

The gains tax is payable on the date of transfer. However, submission of the required forms and related information and documentation relating to the transaction, including the contract to sell the property, is required 20 days prior to the transfer as part of a pre-transfer audit procedure. The submission is reviewed by the taxing authority and a tentative assessment is issued based on the results of this pre-transfer audit. Practitioners should pay special attention to this 20-day requirement to avoid possible delays or postponements of the closing of a transfer. There is a provision in the law that allows for the gains tax to be paid in installments if certain criteria are met.

Generally, the statute of limitations on gains tax filings is three years from the date of transfer. In the case of cooperatives and condominiums or aggregated transfers, the statute of limitations is three years from the date of the last transfer. There is no status of limitations if the forms were willfully false or fraudulent or were not filed at all.