Here a Mansion, There a Mansion, Everywhere a Mansion

WHAT IS MANSION TAX?

Section 1402-a of the Tax Law imposes an additional tax on each conveyance of residential real property or interest in real property when the consideration for the entire conveyance is over $1 million.

Recently, the NYS has become much more aggressive and is auditing purchases as far back as 3 years from date of purchase to assess potential mansion tax. We will discuss some of the implications of this renewed effort to collect mansion tax.

This information does not represent a change in the law but rather a change in policy and procedure by NYS’s auditing division.

DUAL COMMERCIAL/RESIDENTIAL TAXATION

The basic New York State transfer tax rate is $4.00 per thousand of consideration, no matter what the consideration amount is.

In NYC, commercial purchases of over one million dollars are not to subject to mansion tax, but are subject to a higher rate of RPT transfer tax 2.625%.

In NYC, residential purchases of over one million dollars basic RPT transfer tax is 1.425%.

It is important to note that a purchase transaction can be considered commercial for RPT tax purposes and mortgage tax purposes and still MAY be subject to mansion tax.

HERE ARE SOME EXAMPLES IN WHICH THE CONVEYANCE IS SUBJECT TO BOTH TAXES:

MIXED-USE CONVEYANCE

Purchases over $1 million dollars of one parcel that includes both commercial and residential portions.

EXAMPLE: One unit of a two-family house is used for residential purposes, and the other unit is used for commercial purposes as a retail store. The owner sells the house for $1.5 million. The residential unit is valued at $500,000 while the retail unit is valued at $1 million. In determining whether the consideration for the conveyance is $1 million or more, the con-side ration for the entire conveyance must be taken into account. In this case, the consideration for the entire conveyance ($1.5 million) exceeds $1 million. Therefore, the conveyance is subject to the additional tax but only on the value of the residential unit ($500,000).

 

BIFURCATED TRANSACTIONS

Purchases below $1 million dollars that are related properties but aggregate over $1 million.

EXAMPLE: Grantor A enters into a contract to sell a parcel improved by a one-family house to Grantee B for $900,000. Simultaneously, Grantor A contracts with Grantee B to sell an adjacent parcel of vacant land for $300,000. The timing and terms of the contracts indicate that the conveyances are related. Prior to the conveyance, the abutting parcel was kept vacant. Both parcels are used in conjunction with each other and are considered residential real property. Accordingly, the consideration for the entire conveyance of $1.2 million is subject to the additional tax. The grantee must pay an additional tax of $12,000 ($1.2 million x .01).

AGGREGATED TRANSACTIONS

Purchases over $1 million dollars which are for multiple condominium units that are used in conjunction with one another.

EXAMPLE: Individual X conveys three condominium units to Individual Y for $1 million. One unit is an apartment located on the 20th floor of the building. The second unit is a storage room located in the basement. The third unit is a parking space located in the parking garage. Since all three condominium units are used in conjunction with one another, they comprise one residential unit and the additional tax applies to the total.

TRANSFER OF MEMBERSHIP INTEREST

Transfer of a membership interest for over $1 million in lieu of obtaining a deed.

EXAMPLE: Individual S owns 100% of the membership interest in a limited liability company (LLC). The only asset owned by the LLC is a single-family home located in Southampton, New York. The residence has a fair market value of $1.5 million. S has used the home as a summer residence, and has also rented it to others. S transfers his 100% interest in the LLC to Individual T for $1.5 million. The grantee (Individual T) is required to pay additional tax of $15,000 ($1.5 million x .01).

If you are purchasing a residence or a property that has a residential portion it is important to assess the possibility that the purchase will be subject to mansion tax. Note this liability would NOT be covered by your policy.

Riverside Abstract’s team of experienced title attorneys ensure that every transaction goes smoothly. Call today 718-252-4200 or email us at experts@rsabstract.com.

Portions of this memo are derived from Publication 577 (2/10) New York State Department of Taxation and Finance